WEBVTT
00:04.081 --> 00:09.506
[SPEAKER_00]: Welcome to Different Makes a Difference, where we discuss investment matters that matter to everyday investors.
00:10.247 --> 00:16.273
[SPEAKER_00]: Join Audembrown's Equity Analysts as we examine pertinent topics in today's markets and look at things a little differently.
00:17.474 --> 00:20.117
[SPEAKER_00]: Audembrown is an independent Canadian investment firm.
00:20.697 --> 00:27.184
[SPEAKER_00]: We provide integrated wealth management solutions to help clients achieve their financial goals and we've been doing so for over a hundred years.
00:27.864 --> 00:31.708
[SPEAKER_00]: Join us for some lessons we've learned along the way that can make a difference for the future.
00:37.915 --> 00:38.936
[SPEAKER_02]: Hello and welcome.
00:39.016 --> 00:39.877
[SPEAKER_02]: I'm Stephen Boland.
00:40.598 --> 00:48.487
[SPEAKER_02]: We call this podcast different makes a difference because sometimes you have to act a little differently than the crowd to get a better result.
00:49.028 --> 00:49.929
[SPEAKER_02]: Doing so is hard.
00:50.490 --> 00:59.400
[SPEAKER_02]: First off you have to be different and right, but also it's emotionally hard to be different and it usually means you're going against a popular narrative.
00:59.380 --> 01:04.786
[SPEAKER_02]: Popular right now are stocks benefiting from the build-out of artificial intelligence processing.
01:05.066 --> 01:19.763
[SPEAKER_02]: We have long argued that investors should maintain some exposure to this theme, and we still believe that to be true, but we think the U.S. market has too much exposure for the average investor, and we recently recommended going further underweight AI.
01:20.384 --> 01:24.949
[SPEAKER_02]: And we changed the rating on three of our AI related stock recommendations to sell.
01:25.452 --> 01:36.748
[SPEAKER_02]: Vertive, GE, Vernova, and Chemical all served us and our clients extremely well going up between five and 15 times our initial recommendation price.
01:37.309 --> 01:44.760
[SPEAKER_02]: They're still good companies, but the risk and return on these and other AI-related stocks is not what it was.
01:44.740 --> 01:55.577
[SPEAKER_02]: So to talk about our view of AI-related stocks and why we're increasingly choosing to be different, I'm joined today by Alden Brown's Chief Investment Officer Marie Lee.
01:56.198 --> 01:56.839
[SPEAKER_02]: Welcome back Marie.
01:57.200 --> 01:57.660
[SPEAKER_01]: Hi Steven.
01:58.762 --> 02:04.812
[SPEAKER_02]: So Marie, let's start by sizing up the S&P 500 and that's the main U.S. stock index.
02:05.072 --> 02:08.437
[SPEAKER_02]: It's made up of 500 of America's largest companies.
02:09.299 --> 02:12.604
[SPEAKER_02]: If someone worked to buy an S&P 500 fun today,
02:12.837 --> 02:15.701
[SPEAKER_02]: How much AI exposure would they be taking on?
02:16.543 --> 02:18.185
[SPEAKER_02]: How much exposure should somebody have?
02:19.247 --> 02:36.973
[SPEAKER_01]: Well, there's lots of different ways to slice and dice it, but if you take the direct beneficiaries of the AI revolution and then all the indirect companies that participate in it, because it's not just the magnificent seven companies that are obviously benefiting from the AI revolution.
02:37.013 --> 02:42.321
[SPEAKER_01]: It's the utility companies that are growing faster
02:42.605 --> 03:08.410
[SPEAKER_01]: energy companies, both traditional and renewables are, you know, needed to power the AI compute the pipelines were hated a few years ago, but now people can see how we need to get more fuel to market to enlarge part because the power demands of AI are so
03:08.525 --> 03:15.314
[SPEAKER_01]: is a popular theme for a number of reasons, but the AI revolution is certainly one of the reasons that's fueling that.
03:15.574 --> 03:16.755
[SPEAKER_01]: We don't actually own a copper.
03:16.775 --> 03:24.986
[SPEAKER_01]: We own thinning as a sort of a surrogate plan on the on the copper narrative, albumo for batteries, but there's a lot of participation.
03:25.006 --> 03:32.355
[SPEAKER_01]: But more than 50% of the S&P 500 is either directly or indirectly benefiting from the AI revolution.
03:32.656 --> 03:41.613
[SPEAKER_01]: in our portfolio, we actually still have a lot of gearing towards AI, but it's more, it's about a third of our model portfolio.
03:41.674 --> 03:44.038
[SPEAKER_01]: So still a lot, but not more than half.
03:44.279 --> 03:44.399
[SPEAKER_01]: A.
03:44.459 --> 03:45.501
[SPEAKER_01]: So it has to be 500.
03:46.062 --> 03:48.066
[SPEAKER_02]: That's extreme concentration.
03:48.046 --> 03:55.096
[SPEAKER_02]: It kind of reminds of another time when the stock indexes became very concentrated in another theme.
03:55.296 --> 03:58.200
[SPEAKER_02]: In a different theme, it's an episode you know well.
03:58.260 --> 03:59.202
[SPEAKER_02]: You live through it.
03:59.482 --> 04:01.024
[SPEAKER_02]: I think you handled it quite well.
04:01.064 --> 04:04.870
[SPEAKER_02]: It was the technology media in the late 1990s.
04:05.431 --> 04:06.392
[SPEAKER_02]: And at the time,
04:06.828 --> 04:11.459
[SPEAKER_02]: Everybody wanted technology stocks and you were willing to be different at that time as well.
04:11.780 --> 04:14.126
[SPEAKER_02]: He told us a little bit about what was going on back then.
04:14.768 --> 04:24.752
[SPEAKER_01]: Yeah, I can, but you know, maybe I'll sort of back up a little bit and, you know, acknowledge that being different is tough and can't be stressful because you're often early.
04:24.732 --> 04:34.985
[SPEAKER_01]: And early for a lot of people is wrong, and if you're a couple of years too early, it is very much wrong, and it can be tough.
04:35.105 --> 04:45.137
[SPEAKER_01]: So earlier in May, the big hyperscalers, Amazon, Google, Microsoft, and Mata, they all reported their results in one day.
04:45.404 --> 05:07.193
[SPEAKER_01]: And there were awesome revenues were roughly 20% across the board, but their cloud businesses were all the AI activities going on reported even faster growth from 30% in Amazon's cloud all the way up to more than 60% in Google's cloud business with Microsoft in the middle just.
05:07.291 --> 05:09.734
[SPEAKER_01]: phenomenal growth rates for these businesses.
05:10.274 --> 05:19.305
[SPEAKER_01]: Everybody beat their expectations or the analysts expectations, they raise guidance, they reported bigger backlogs, and they all up their capital spending.
05:19.345 --> 05:27.935
[SPEAKER_01]: The four of them together are now expected to spend more than $700 billion this year, which is just a staggering number.
05:28.736 --> 05:29.637
[SPEAKER_02]: Absolutely.
05:29.768 --> 05:34.997
[SPEAKER_02]: I mean, we're often looking at companies that are growing 3, 4, 5% a year and 10% good.
05:35.398 --> 05:36.700
[SPEAKER_02]: And these are massive companies.
05:36.740 --> 05:38.303
[SPEAKER_02]: Generally, you mungus growth.
05:38.784 --> 05:39.465
[SPEAKER_01]: Absolutely.
05:39.565 --> 05:42.951
[SPEAKER_01]: So you asked me, you know, what was that like back then?
05:43.271 --> 05:48.060
[SPEAKER_01]: And see, you know, I certainly have lots of memories, but I can use AI now to sharpen those up.
05:48.080 --> 05:53.970
[SPEAKER_01]: So after those phenomenal results at the beginning of the May from those hyperscalers,
05:53.950 --> 06:13.153
[SPEAKER_01]: I was driving home and I dictated to anthropics clothes as I do often these days, and I said, I want you to pull the reports for Nortele and Cisco, which was the biggest company that was helping build the internet back at the turn of the century and some of the other players.
06:13.253 --> 06:15.696
[SPEAKER_01]: I said, pull their first quarter results from 2000.
06:16.137 --> 06:22.725
[SPEAKER_01]: I want to know what those look like and felt like, and the summary is that they were even more spectacular.
06:22.705 --> 06:25.007
[SPEAKER_01]: Nortale's revenues were up 50%.
06:25.267 --> 06:26.088
[SPEAKER_01]: Cisco's 55%.
06:27.309 --> 06:34.535
[SPEAKER_01]: JDS uniface, which was a, they did specially optical components that went into the fiber that powered the internet.
06:34.776 --> 06:35.897
[SPEAKER_01]: Their revenues were up 155%.
06:37.018 --> 06:45.505
[SPEAKER_01]: They all beat and raised their guidance, reported bigger backlogs, talked about capacity constraints that they couldn't keep up.
06:45.966 --> 06:52.071
[SPEAKER_01]: Point being rhymes a lot with what we heard
06:52.051 --> 07:09.148
[SPEAKER_01]: But, you know, the news was even more remarkable math and the point of bringing that up is that we know with hindsight that there was an absolute cliff around the corner that was, you know, the business is went on to get a report great results for the next couple of quarters, but into.
07:09.601 --> 07:20.299
[SPEAKER_01]: 2001 they fell off a cliff and there was no sign of that at the time, you know, Cisco's stock had already peaked at the time or tell with ultimately go bankrupt.
07:20.840 --> 07:29.735
[SPEAKER_01]: The the tech late in NASDAQ index experienced the peak to trough the decline of almost 80% in less than two years.
07:30.396 --> 07:34.343
[SPEAKER_01]: And it wasn't just technology stocks that had a rough ride back then.
07:34.323 --> 07:38.228
[SPEAKER_01]: you know following the effort for you that existed at the turn of the century.
07:38.729 --> 07:43.735
[SPEAKER_01]: America's biggest and best companies companies like Walmart, Johnson and Johnson and Coca-Cola.
07:44.156 --> 07:46.079
[SPEAKER_01]: They had crazy valuations as well.
07:46.699 --> 07:51.886
[SPEAKER_01]: Canadian who bought the S&P 500 index or an index fund at the end of 1999.
07:51.906 --> 07:57.353
[SPEAKER_01]: And Canadian dollars would have lost the third of their money over the following decade.
07:57.614 --> 08:03.081
[SPEAKER_01]: So
08:03.685 --> 08:08.008
[SPEAKER_01]: not for the people that are paid up for those stocks in the hate it.
08:08.073 --> 08:14.624
[SPEAKER_02]: an amazing story when you talk about the growth rate of these companies and the build out of the internet, which did indeed happen.
08:14.985 --> 08:19.994
[SPEAKER_02]: It only made sense to buy these things and it turned out to be an absolute disaster of an investment.
08:20.595 --> 08:30.071
[SPEAKER_02]: I find it interesting you've been telling a story around here recently about a belief back then that the internet was doubling every hundred days.
08:30.672 --> 08:33.878
[SPEAKER_02]: Share that story and what kind of lessons are you drawing from that?
08:34.162 --> 08:58.313
[SPEAKER_01]: Yeah, it came out out of the scraping of the results from 2000 that I did with the help of AI and one of the things that it served up was that the CEO of Cisco, John Chambers had remarked on the conference call that the internet was doubling every hundred days and so I pulled on that and said, well, where did that come from and it's a pretty fascinating story where it came from.
08:58.613 --> 09:05.223
[SPEAKER_01]: was from an engineer at a company called UU Matt, which was a subsidiary of WorldCom.
09:05.984 --> 09:14.336
[SPEAKER_01]: And WorldCom of course, went on to be the largest bankrupt sand fraud in American history in 2002.
09:15.497 --> 09:27.034
[SPEAKER_01]: It was a company that built the backbone of the internet around the world, the fibrofic cables that circle the worlds and carried that internet traffic
09:27.520 --> 09:38.618
[SPEAKER_01]: and they grew by acquisition and it turned out they had some pretty fraudulent accounting treatments and we're telling a story that just wasn't true and and they're CEO ultimately went to jail for that sin.
09:39.239 --> 09:55.384
[SPEAKER_01]: But the subsidiary company there was an engineer that was tasked by his boss to build a model, a spreadsheet, modeling out various demands scenarios so that they would know how to provision traffic on their network that they were building quickly around the world.
09:55.921 --> 10:01.446
[SPEAKER_01]: And the 100 day, the doubling every 100 days was merely the optimistic scenario.
10:02.367 --> 10:05.850
[SPEAKER_01]: But from there, WorldCom was in the business of selling bandwidth.
10:06.471 --> 10:10.235
[SPEAKER_01]: And so that made its way into their marketing material.
10:10.275 --> 10:16.501
[SPEAKER_01]: And before you knew it, it was repeated by the heads of AT&T and BCE.
10:16.641 --> 10:23.127
[SPEAKER_01]: And it got written into government reports on the digital regulatory evolution.
10:23.461 --> 10:29.473
[SPEAKER_01]: the former chair of the federal communications commissions even wrote a book and it was in there.
10:29.513 --> 10:30.695
[SPEAKER_01]: So it became gospel.
10:31.276 --> 10:32.017
[SPEAKER_01]: But it was wrong.
10:32.498 --> 10:38.229
[SPEAKER_01]: The really interesting thing is that 2000 was the peak in belief.
10:38.249 --> 10:42.718
[SPEAKER_01]: But most of the really great things that came from the internet,
10:42.698 --> 10:53.097
[SPEAKER_01]: Didn't come for, and until years later, people knew that it was going to change the world that truly did, but, you know, most of the modern internet was introduced way after that.
10:53.117 --> 10:57.245
[SPEAKER_01]: And I've got some examples, you know, Google went public in 2004.
10:58.266 --> 11:00.270
[SPEAKER_01]: Facebook was launched the same year.
11:00.330 --> 11:03.576
[SPEAKER_01]: YouTube didn't come out until 2005.
11:03.556 --> 11:12.507
[SPEAKER_01]: Twitter, 2006, as well as Amazon web services at same year, which is their cloud business is growing wonderfully right now.
11:12.748 --> 11:13.348
[SPEAKER_01]: The iPhone.
11:13.889 --> 11:27.927
[SPEAKER_01]: In the middle of the decade, we all talked about our crack barriers and thought that we'd be using those forever, but they were just texting machines at the beginning of the decade, but the iPhone came out in 2007, same year that Netflix started streaming video.
11:27.907 --> 11:34.658
[SPEAKER_01]: And the Apple I started and opened until 2008, and Uber was introduced to the world in 2009.
11:35.179 --> 11:39.566
[SPEAKER_01]: So, you know, the belief that the internet was going to change the world was dead right.
11:40.327 --> 11:43.452
[SPEAKER_01]: But what came next, succeeded in our wildest imagination.
11:43.567 --> 11:54.537
[SPEAKER_01]: But the lesson is that investors got out over the skis and they lost, you know, paint too much for these wonderful companies that we're going to change the world they did, but they paid too much and they lost a bundle.
11:54.757 --> 11:55.519
[SPEAKER_01]: That's the lesson.
11:56.000 --> 11:57.625
[SPEAKER_02]: What's that Mark Twain quotes?
11:57.986 --> 11:59.550
[SPEAKER_02]: I can't remember it off the top of my head.
11:59.817 --> 12:01.920
[SPEAKER_01]: It ain't what you don't know that gets you in trouble.
12:02.421 --> 12:04.525
[SPEAKER_01]: It's what you know for sure that just ain't so.
12:05.286 --> 12:12.358
[SPEAKER_01]: And the irony with that quote is that it's been misattributed to him and I don't know who actually said it.
12:12.418 --> 12:13.420
[SPEAKER_01]: It's a great quote.
12:13.440 --> 12:17.927
[SPEAKER_01]: It drives our thinking all the time, but he didn't actually say it.
12:19.443 --> 12:24.512
[SPEAKER_02]: So, sticking with the late 90s here, what eventually killed the bubble?
12:24.772 --> 12:26.355
[SPEAKER_02]: These were very popular stocks.
12:26.395 --> 12:29.962
[SPEAKER_02]: They came crashing down, what went on, what was the cause of it?
12:30.703 --> 12:34.129
[SPEAKER_01]: It was actually technology that killed the bubble, ironically.
12:34.951 --> 12:37.435
[SPEAKER_01]: You know, internet infrastructure got overbuilt.
12:37.837 --> 12:54.377
[SPEAKER_01]: part because people thought the internet demand was growing faster than it was, but the bigger reason for the collapse was the the absolute drop in the cost of bandwidth moving data around the world, the price of doing that, absolutely collapse because of
12:55.049 --> 12:57.373
[SPEAKER_01]: of technological advancements.
12:57.773 --> 13:02.781
[SPEAKER_01]: And we laid all this fiber to move internet data around the world initially.
13:02.941 --> 13:07.147
[SPEAKER_01]: You know, those fiber off the cables just carried away like the light.
13:07.528 --> 13:10.572
[SPEAKER_01]: And that's how they moved the data around.
13:10.893 --> 13:16.281
[SPEAKER_01]: But then they learned how to send dozens of wavelengths down the same pipe.
13:16.598 --> 13:17.539
[SPEAKER_01]: with different colors.
13:18.060 --> 13:20.844
[SPEAKER_01]: And then it was 50 different wavelengths.
13:20.924 --> 13:23.488
[SPEAKER_01]: And so they kept on developing new technologies.
13:23.528 --> 13:26.252
[SPEAKER_01]: That's what the Nortels are the worlds and the CISCOs are the world.
13:26.292 --> 13:31.419
[SPEAKER_01]: We're figuring out how to turn like four lane highways into like 50 lane freeways.
13:32.120 --> 13:38.910
[SPEAKER_01]: And so not only were we laying a lot of fiber, but we were improving increasing the capacity.
13:39.127 --> 13:42.433
[SPEAKER_01]: to push traffic down those networks tremendously.
13:42.453 --> 13:45.097
[SPEAKER_01]: And so the price of bandwidth dropped like 95%.
13:45.578 --> 13:50.887
[SPEAKER_01]: So the people had invested in the initial networks, couldn't get a return on their investment.
13:50.927 --> 13:55.575
[SPEAKER_01]: And so we ultimately used all of that bandwidth.
13:55.675 --> 13:59.722
[SPEAKER_01]: And we had lots to grow into, but we had way more than we needed early on.
13:59.922 --> 14:03.328
[SPEAKER_01]: And that's what really killed the party.
14:04.000 --> 14:05.942
[SPEAKER_01]: You know, the big constraint today is power.
14:06.242 --> 14:09.946
[SPEAKER_01]: We don't have enough to build data centers at the rate that we want to.
14:10.447 --> 14:13.750
[SPEAKER_01]: But there's a mad scramble to add all sorts of power.
14:14.070 --> 14:20.657
[SPEAKER_01]: You know, natural gas as seen as the bridge in fuel, that's why GE for NOVA has been such a hot stock.
14:20.677 --> 14:24.681
[SPEAKER_01]: They make the turbines that generate electricity from that natural gas.
14:25.061 --> 14:26.743
[SPEAKER_01]: There's been a nuclear renaissance.
14:26.823 --> 14:30.767
[SPEAKER_01]: And that's why Camico has been just a spectacular stock.
14:30.747 --> 14:32.549
[SPEAKER_01]: You know renewables.
14:33.450 --> 14:39.517
[SPEAKER_01]: The world's been investing more and more and renewables and the need for them is even greater with this AI revolution.
14:39.657 --> 14:45.224
[SPEAKER_01]: It's sort of all of the about, you know, unfortunately and sadly, the world's embracing cool again.
14:45.264 --> 14:56.798
[SPEAKER_01]: We were shutting down coal plans, but we're delaying that now and so there's a race to increase our energy capacity as much as possible to feed this AI revolution.
14:57.278 --> 14:58.780
[SPEAKER_01]: But, you know,
14:59.435 --> 15:02.323
[SPEAKER_01]: You will figure out how to make.
15:02.506 --> 15:31.635
[SPEAKER_01]: the chips and the compute more efficient and they're doing it every day like they're making tremendous a headway so far you know demands growing faster than the technological advancements can keep up I'm certain that at some point boom will be followed by bust you know the top part is we don't know when you know is it gonna happen this year is it gonna happen 510 years down the road and that's what we're anxious about I'm anxious about it when I'm underweight
15:31.615 --> 15:40.471
[SPEAKER_01]: But the valuations of some of these companies are, you know, they're discounting an expectation that demand is flies going to remain tight forever.
15:40.712 --> 15:42.475
[SPEAKER_01]: And that's not the lesson from history.
15:42.715 --> 15:51.852
[SPEAKER_01]: Every technological revolution has had a boom boss cycle for the exact same reasons, you know, we've been talking about.
15:52.439 --> 16:14.245
[SPEAKER_02]: Okay, so you mentioned that you don't know when this is going to end, you didn't know when it was going to end in the late 90s either, but I think there were some warning signs that you were seeing that made you go underweight technology, not own nor tell, for example, what were those warning signs and are there any parallels there to what we're seeing today?
16:14.748 --> 16:40.907
[SPEAKER_01]: Yeah, there were warning signs and in your right, we didn't own Nortale, but we did own a company called Alcatel, which was the French counterpart to Nortale that made telecom equipment and they were going about as fast as Nortale, but they traded at half the valuation multiple 35 times earnings instead of 70 is what I remember and there was two things that happened that I was getting nervous with the valuations and wondering when we were going to.
16:41.326 --> 16:46.067
[SPEAKER_01]: you know, transition to some other shocks that were better value at the time.
16:46.107 --> 16:47.674
[SPEAKER_01]: And I had woken up.
16:48.262 --> 16:56.075
[SPEAKER_01]: one day and read the paper and read about the TD dividend income fund that have a third of their portfolio invested in Norteau.
16:56.796 --> 16:58.559
[SPEAKER_01]: Norteau barely paid a dividend.
16:58.579 --> 17:00.182
[SPEAKER_01]: It was like 0.009%.
17:01.564 --> 17:09.056
[SPEAKER_01]: And he thought, well, when it dividend fund, a big dividend fund has a third of the portfolio and a business that doesn't really pay a dividend.
17:09.077 --> 17:10.339
[SPEAKER_01]: Who's left by the stock?
17:10.419 --> 17:11.541
[SPEAKER_01]: So that was number one.
17:12.061 --> 17:14.826
[SPEAKER_01]: And number two was, I remember reading about a
17:14.806 --> 17:18.092
[SPEAKER_01]: a bond conference or a fixing call conference in New York.
17:18.593 --> 17:27.950
[SPEAKER_01]: And a speaker there had surveyed the crowd and said, who's going to invest in the telecom companies that are financing this huge bills out of the internet?
17:28.251 --> 17:30.054
[SPEAKER_01]: And nobody put up their hand.
17:30.074 --> 17:32.899
[SPEAKER_01]: And I thought, you know, that's a real sign that parties over.
17:32.879 --> 17:54.567
[SPEAKER_01]: everybody's already bought and the people that are financing this are done and there's another I think lesson in this is that the memory that we all have and certainly it was the memory that that I had until I started to think about it and just that the trigger for the collapse was the bond market refusing to lend to these startup telco companies.
17:54.547 --> 18:00.098
[SPEAKER_01]: You know, the incumbents we're doing it too, but there are so many start-out companies that were raising money hand over fast.
18:00.459 --> 18:02.763
[SPEAKER_01]: And when the bond markets have, we're not giving you money anymore.
18:02.803 --> 18:12.522
[SPEAKER_01]: Well, that meant they couldn't buy equipment from Nortella's Lucent and all these companies, but the demise of those companies was the symptom.
18:12.502 --> 18:20.700
[SPEAKER_01]: And the collapse of the telecom, the incumbent telecom company share prices was another symptom.
18:20.720 --> 18:23.607
[SPEAKER_01]: The disease was the technological advancements.
18:24.028 --> 18:30.061
[SPEAKER_01]: The collapse in the price of bandwidth, the deterioration and the economics of building the internet.
18:30.101 --> 18:31.725
[SPEAKER_01]: People couldn't get a return on that.
18:31.705 --> 18:42.619
[SPEAKER_01]: And here now, we find some comfort that the people finance in the AI or revolution, primarily, are these big companies, the Microsoft, the Amazon and whatnot.
18:43.040 --> 18:48.747
[SPEAKER_01]: And they are amazing companies, their diverse businesses, they're not going to go bankrupt.
18:49.128 --> 18:50.249
[SPEAKER_01]: They're going to be around forever.
18:50.490 --> 18:52.953
[SPEAKER_01]: And that's part of the reason why we still own them.
18:52.973 --> 18:58.540
[SPEAKER_01]: But they're not the businesses that they
18:58.705 --> 19:02.730
[SPEAKER_01]: They're free cash flow is going down because they're making all these investments right now.
19:02.751 --> 19:07.337
[SPEAKER_01]: Now, there will be a payoff, but how long will it take to come and how big will it be?
19:07.377 --> 19:08.699
[SPEAKER_01]: They're not borrowing.
19:08.919 --> 19:10.461
[SPEAKER_01]: They used to have piles of cash.
19:10.902 --> 19:15.047
[SPEAKER_01]: So the multiple that investors will pay for them will not be as high.
19:15.388 --> 19:20.835
[SPEAKER_01]: That's why they're not as valued as sky-high as the Norteils were at the turn of this entry.
19:21.496 --> 19:25.101
[SPEAKER_01]: But what we need to watch is the economics.
19:25.081 --> 19:44.052
[SPEAKER_01]: of building these data centers and whether or not didn't man will continue to strip the technological advancements and we're not there yet, but we don't know where that's coming but we've got to be careful about the price that we pay for that to make sure that our clients get a return on their investment so that's what we're focused on.
19:44.588 --> 19:59.206
[SPEAKER_02]: I wanted to touch as well on circular financing and something we've talked about before on this podcast, but just remind us why you saw the late 90s around circular financing and why you're seeing today and maybe just start what is circular financing?
19:59.547 --> 20:01.529
[SPEAKER_01]: It's what's going on in this area.
20:01.549 --> 20:05.955
[SPEAKER_01]: There's something a little different that rhymes with it from the internet revolution.
20:06.408 --> 20:18.732
[SPEAKER_01]: But what's going on right now is the suppliers of the technology or investing equity into their customers and the customers are buying from the suppliers with that money.
20:19.233 --> 20:25.986
[SPEAKER_01]: Invidia invests in their customers and their customers turn around to buy Nvidia chips, Microsoft.
20:25.966 --> 20:30.414
[SPEAKER_01]: invests billions into open AI, which is chatGBT.
20:30.474 --> 20:35.883
[SPEAKER_01]: And then open AI turns around and buys compute from Microsoft's cloud business.
20:35.963 --> 20:42.575
[SPEAKER_01]: And so there's a lot of this sort of circular finance inner investment going on and it helps perpetuate.
20:42.595 --> 20:44.698
[SPEAKER_01]: It's good for everybody in the chain.
20:45.339 --> 20:48.284
[SPEAKER_01]: And that wasn't so much of what was happening.
20:48.304 --> 20:49.847
[SPEAKER_01]: There was a little bit of that happening.
20:50.165 --> 20:56.494
[SPEAKER_01]: at the turn of the century and the internet revolution, but what was happening more was vendor financing.
20:57.074 --> 21:02.622
[SPEAKER_01]: So, nor tell when a equipment to a startup helco and say, you know, what?
21:02.642 --> 21:12.055
[SPEAKER_01]: You can pay us once your business starts maturing and you have cash flow and unfortunately for an hotel, those businesses never came to, you know, never flourished.
21:12.415 --> 21:15.379
[SPEAKER_01]: So they ultimately weren't able to pay that money back.
21:15.359 --> 21:26.449
[SPEAKER_01]: And the magnitude of this circular financing that's going on today, it's similar in size to the scale of the vendor financing that was going on.
21:26.750 --> 21:27.391
[SPEAKER_01]: back then.
21:27.491 --> 21:31.136
[SPEAKER_01]: So it's, it's a bit of a flag on the field, something that we're watching.
21:31.176 --> 21:36.783
[SPEAKER_01]: The players in this game, they're, they're all very well capitalized and funded.
21:37.244 --> 21:44.032
[SPEAKER_01]: But, you know, the Anthropics and OpenAI's, they constantly have to go back to the market for, for more point by an aunts.
21:44.072 --> 21:50.040
[SPEAKER_01]: And, you know, I think the worry is that, you know, this build out of data centers and,
21:50.020 --> 21:51.463
[SPEAKER_01]: AI will do for the world.
21:51.483 --> 21:52.926
[SPEAKER_01]: We'll continue for a long time.
21:53.146 --> 22:07.413
[SPEAKER_01]: But, you know, some of the companies that are participating in the hottest stocks, the virtuos that do the cooling and power systems for the data centers of the GE, for novos, or the chemicals that we've talked about, they're susceptible.
22:07.473 --> 22:09.497
[SPEAKER_01]: Their valuations are very high.
22:09.848 --> 22:16.960
[SPEAKER_01]: and if these hyperscalers, the Microsoft, the Amazon, the Google's, like take their foot off the accelerator, it's just a bet.
22:17.581 --> 22:28.920
[SPEAKER_01]: I think those are the kind of stocks, if the experience at the turn of the century is a guide post, those things could hit a huge air pocket, you know, just when those guys decide it's time to,
22:28.900 --> 22:36.096
[SPEAKER_01]: You know, still build it out, but slow it down, those things I think could drop like 30, 40, 50% in short order.
22:36.336 --> 22:38.281
[SPEAKER_01]: And that's why we've moved on from them.
22:38.802 --> 22:40.145
[SPEAKER_01]: And it's tough, though.
22:40.165 --> 22:42.430
[SPEAKER_01]: Like, because they keep running in the short term.
22:42.450 --> 22:47.922
[SPEAKER_01]: And you know, we can talk about, you know, our experience back at the turn of the century with some of that.
22:48.239 --> 22:56.953
[SPEAKER_02]: Yeah, I just want to pick up on the valuation point there and just to put vertive into context for people when we recommended vertive and I think it was 2021.
22:58.295 --> 23:00.158
[SPEAKER_02]: It was earned about a dollar earnings per share.
23:00.678 --> 23:01.800
[SPEAKER_02]: And we saw the potential.
23:01.820 --> 23:10.193
[SPEAKER_02]: I can probably get to three dollars and if this is a stock that can trade 15 to 20 times earnings, you got a $45 to $60 stock.
23:10.213 --> 23:12.036
[SPEAKER_02]: The stock was $20.
23:12.016 --> 23:18.586
[SPEAKER_02]: And then AI came along and all of a sudden, oh, there was the potential to get the $7 or $8 per share.
23:19.047 --> 23:21.350
[SPEAKER_02]: It's like, okay, well, you give 20 times on that.
23:21.651 --> 23:26.618
[SPEAKER_02]: You'd have $150, $200 share price, and now there's a bullcase of $11.
23:27.039 --> 23:29.042
[SPEAKER_02]: It's even getting thrown $20 out there.
23:29.823 --> 23:32.287
[SPEAKER_02]: And this is a stock that's trading for $150.
23:33.288 --> 23:36.373
[SPEAKER_02]: So all of a sudden, you say, this was a company earning $1.
23:36.393 --> 23:40.960
[SPEAKER_02]: And now there's this bullcase, we don't know if they can get to it,
23:40.940 --> 23:45.887
[SPEAKER_02]: Well, it's already factoring in the bullcase, and there's a whole lot of downside if that doesn't come about.
23:46.508 --> 23:50.934
[SPEAKER_01]: And I'd remind you, because you're the guy that was covered that name, recommended it at 20.
23:51.375 --> 24:00.348
[SPEAKER_01]: But it fell in half before it went on this huge end when, you know, so it's been a 15 bag or more than a 15 bagger from our initial cost.
24:00.528 --> 24:10.002
[SPEAKER_01]: But it's it's been like a 30 bagger plus from the low, and they of course had a stumble when the inflation from the pandemic hit and they hadn't
24:10.403 --> 24:13.390
[SPEAKER_01]: and they didn't have inflation escalators in their contract.
24:13.430 --> 24:18.301
[SPEAKER_01]: So, but that's a reminder that, you know, these things can go from absolutely loved.
24:18.401 --> 24:25.277
[SPEAKER_01]: And you have to be thinking differently than the crowd at those junctures or else you can get really hurt.
24:25.437 --> 24:25.678
[SPEAKER_01]: Yeah.
24:25.658 --> 24:45.097
[SPEAKER_02]: It paid for a long time writing the valuation higher, and we did that on a lot of stocks over the last number of years, not just vertive, but I think you're worried that maybe writing higher price stocks won't be as lucrative as it had been in past years that the valuation might make more of a difference going forward.
24:45.117 --> 24:46.620
[SPEAKER_02]: Can you expand on that point?
24:46.600 --> 24:55.552
[SPEAKER_01]: Yeah, it's something that's very much on our mind and for most of my career or for all of my career, we lived in a disinflationary environment.
24:55.712 --> 25:02.741
[SPEAKER_01]: What disinflation is, as opposed to outright deflation, it just means lower and lower inflation over time.
25:02.781 --> 25:07.968
[SPEAKER_01]: An inflation peaked in the early 80s, and it didn't bottom until the pandemic.
25:07.988 --> 25:16.219
[SPEAKER_01]: But as that happened, the inflation has a huge influence on
25:16.638 --> 25:22.767
[SPEAKER_01]: drops in mortgage rates, have a positive influence on home prices, same thing happens with all assets.
25:22.847 --> 25:33.341
[SPEAKER_01]: And so this 40-year period of this inflation group drove higher and higher valuations, the biggest beneficiaries of higher valuations are your growth stocks.
25:33.482 --> 25:45.919
[SPEAKER_01]: Because they report better things far into the future and the lower the interest rate or the discount rates, the more value well those future earnings are.
25:45.899 --> 25:46.620
[SPEAKER_01]: for decades.
25:47.081 --> 25:48.503
[SPEAKER_01]: But we're on the other side of that.
25:48.583 --> 25:55.315
[SPEAKER_01]: We're in a different regime, a different era, where I think we're going to be living with higher inflation.
25:55.375 --> 25:59.362
[SPEAKER_01]: I'm not saying run away inflation, but higher inflation in generally higher interest rates.
25:59.902 --> 26:06.253
[SPEAKER_01]: And that puts the popular growth stocks that have the higher valuations at risk.
26:06.487 --> 26:11.054
[SPEAKER_01]: of those valuation multiples contracting after decades of watching them expand.
26:11.494 --> 26:22.150
[SPEAKER_01]: And so for the better part of the last two years, we've quietly been rotating out of the more expensive names and the names that we've sold most recently are among the most expensive.
26:22.691 --> 26:35.970
[SPEAKER_01]: And we still want to own businesses that can grow, but we're much more conscious of the price that we pay for those businesses today because of that inflation and interest rate backdrop.
26:35.950 --> 26:45.984
[SPEAKER_01]: They live their whole life under a different regime and we understand the relationship and how the world works in that world, but we're not in that world anymore, so we have to think differently.
26:46.505 --> 26:47.286
[SPEAKER_02]: Really hard to do.
26:47.466 --> 26:51.032
[SPEAKER_02]: I mean, it's hard to get off the bus on something that's been treating you well.
26:51.552 --> 26:56.900
[SPEAKER_02]: I know I've been selling down some of my AI winners like Vertif and it kills me to look at the tax bill.
26:56.920 --> 26:58.222
[SPEAKER_02]: I'm going to have at the end of the year.
26:58.262 --> 27:00.405
[SPEAKER_01]: How do you get around things like that?
27:00.959 --> 27:09.032
[SPEAKER_01]: Well, it's true and I, you know, I can say earlier on in my career, you know, I was a young analyst and I didn't have a big portfolio.
27:09.112 --> 27:27.861
[SPEAKER_01]: So I could think about these things more objectively and, you know, older and later in my career and fortunately I have a decent portfolio, but the unfortunate thing of things working out well and holding a bunch of great companies for many, many years is that I like a lot of other people have these huge capital gains and I don't want to pay
27:27.841 --> 27:37.279
[SPEAKER_01]: the tax mat, but maybe a little retrospective here to shed some light on just how that influences people.
27:38.241 --> 27:44.033
[SPEAKER_01]: Back in 2000, Nortelle was our firm's biggest position and he might say, well, how could that be?
27:44.433 --> 27:45.816
[SPEAKER_01]: You weren't even recommending it.
27:46.537 --> 27:48.381
[SPEAKER_01]: But BCE,
27:48.766 --> 27:57.338
[SPEAKER_01]: had been our biggest position and which was a perfect stock for conservative investors because they paid a big dividend, they grew that dividend year and year out.
27:57.398 --> 28:01.184
[SPEAKER_01]: And so it was our biggest position, but they also owned a chunk of Norteau.
28:01.665 --> 28:05.130
[SPEAKER_01]: And they spun that out to investors in early 2000.
28:05.150 --> 28:11.719
[SPEAKER_01]: And so Norteau became our biggest position in starting in June of 2000 through to June of 2001.
28:12.222 --> 28:15.065
[SPEAKER_01]: I wrote 12 cell reports on Nortale.
28:15.766 --> 28:19.429
[SPEAKER_01]: And I think we only sold about 5% of our position.
28:19.690 --> 28:22.533
[SPEAKER_01]: Like people didn't want to pay the tax.
28:23.153 --> 28:34.124
[SPEAKER_01]: And one of the points is that maybe it was easier for me to do that earlier in my career, where I didn't have skin in the game, and I didn't have a big portfolio with a bunch of capital gains.
28:34.205 --> 28:40.491
[SPEAKER_01]: And so it was easier to serve up the objective advice on, we should really move on from this thing.
28:40.471 --> 28:59.796
[SPEAKER_01]: Whereas it's harder and you know, we started buying America's biggest best companies in the mid 2000s and so, you know, a lot of them we've been holding for, you know, upwards of two decades and not all of them, but we've been building capital gains and a lot of these great companies and, you know, most of the times you just want to hold.
28:59.776 --> 29:12.958
[SPEAKER_01]: great companies people can figure out what are the great companies and you know warm buffets says buy the S&P 500 index just hold that forever and that's great advice almost all of the time but every once in a while.
29:13.512 --> 29:19.504
[SPEAKER_01]: be a for you the belief in these businesses gets two grand and the valuations get too high.
29:19.845 --> 29:24.574
[SPEAKER_01]: That happened in the early 70s with a group of stocks called the nifty 50.
29:24.594 --> 29:31.909
[SPEAKER_01]: It happened at the turn of the century, not just with the tech at the internet revolution, but with America's biggest and best companies.
29:31.889 --> 29:45.710
[SPEAKER_01]: And I think exists today, not as bad as it was at the turn of the century, but I think it's the time that we have to be, you know, we have to move on from some of these stocks that treated us very well and look for better value outside of the spotlight.
29:45.730 --> 29:47.252
[SPEAKER_01]: And so that's what we've been telling clients.
29:47.833 --> 29:49.476
[SPEAKER_02]: So where are you finding better value?
29:50.477 --> 29:54.403
[SPEAKER_01]: Well, our biggest overweight is energy and you know,
29:54.890 --> 30:12.747
[SPEAKER_01]: We were overweighted before the Iran war and sometimes you know that's a sad way to get lucky, but that's certainly has helped because it was one area of the market that people still really hated and these companies had gotten a lot more disciplined and the way they handled shareholder money, they were
30:13.182 --> 30:26.019
[SPEAKER_01]: giving a lot more money back to share holders view vis-a-vis dividends or stock buybacks, their balance sheets were better, and their valuation, Sarah generating lots of free cash flow, and you weren't having to pay up for it.
30:26.340 --> 30:30.305
[SPEAKER_01]: People were worried about a glut of oil in the near-term this year.
30:30.665 --> 30:34.110
[SPEAKER_01]: Those worries of course have all gone away, let's get closer to the straight-up
30:34.445 --> 30:41.255
[SPEAKER_01]: for a moose, but there's a tight correlation to global growth and energy consumption, all types of energy.
30:41.275 --> 30:47.724
[SPEAKER_01]: And I think we're all learning that oils and input to a lot of the products that we use in every day lives.
30:47.824 --> 30:54.634
[SPEAKER_01]: And we all want to wean our cells off of that and build renewables and reinvest in renewables as well.
30:54.914 --> 30:57.998
[SPEAKER_01]: And that will continue to grow and importance.
30:58.519 --> 31:01.363
[SPEAKER_01]: It's an area of the market that we think people are,
31:01.597 --> 31:10.587
[SPEAKER_01]: Even today, still too cautious that the systemic conductor part of the S&P 500 is like 17% today.
31:11.288 --> 31:13.631
[SPEAKER_01]: Energy is like three or four percent.
31:14.071 --> 31:19.858
[SPEAKER_01]: It's the complete opposite of where things were in 2007 before the financial crisis.
31:19.938 --> 31:24.944
[SPEAKER_01]: Back then, energy was 17% of that index and semiconductors were four.
31:25.765 --> 31:30.490
[SPEAKER_01]: And we're much more comfortable being in the far less crowded trade.
31:30.976 --> 31:32.058
[SPEAKER_02]: That makes a lot of sense.
31:32.138 --> 31:33.621
[SPEAKER_02]: I think that's a good place to end it.
31:33.841 --> 31:35.464
[SPEAKER_02]: Thanks for joining today, Murray.
31:35.484 --> 31:40.394
[SPEAKER_02]: I think the parallels you're drawing to the late 1990s are quite interesting.
31:40.935 --> 31:44.361
[SPEAKER_02]: You know, the build out of the internet did indeed change the world.
31:44.780 --> 31:50.847
[SPEAKER_02]: But many investors lost a lot of money owning wildly popular stocks when that investment cycle turned.
31:51.628 --> 31:55.772
[SPEAKER_02]: Today, the US market has high exposure to AI-related stocks.
31:56.353 --> 31:59.697
[SPEAKER_02]: Certainly, some exposure is fine, but keep it measured.
32:00.217 --> 32:02.540
[SPEAKER_02]: The stocks are popular and there are risks.
32:02.960 --> 32:13.352
[SPEAKER_02]: It's emotionally hard to be different to risk missing out on a popular theme, but it increasingly seems like we're at one of those times when being different will make a profitable difference.
32:13.332 --> 32:14.553
[SPEAKER_02]: Thanks everyone for listening.
32:14.954 --> 32:16.315
[SPEAKER_02]: We look forward to talking again soon.
32:19.959 --> 32:23.103
[SPEAKER_00]: Thank you for listening to another episode of Different Makes a Difference.
32:23.723 --> 32:27.267
[SPEAKER_00]: Just as every individual is unique, so are your financial circumstances.
32:27.888 --> 32:31.812
[SPEAKER_00]: Be sure to talk to your professional advisors for advice related specifically to you.
32:31.872 --> 32:36.057
[SPEAKER_00]: Our podcast is for general information purposes for Canadians only.
32:36.097 --> 32:41.483
[SPEAKER_00]: The views expressed are those of the presenters and may not reflect the opinions of Autumn Brown.
32:41.463 --> 32:47.846
[SPEAKER_00]: Be sure to check out our full disclaimer and subscribe to the podcast at AudlandBrown.com slash different makes a difference.
32:48.670 --> 32:51.540
[SPEAKER_00]: AudlandBrown is a member of the Canadian Investor Protection Fund.
00:04.081 --> 00:09.506
[SPEAKER_00]: Welcome to Different Makes a Difference, where we discuss investment matters that matter to everyday investors.
00:10.247 --> 00:16.273
[SPEAKER_00]: Join Audembrown's Equity Analysts as we examine pertinent topics in today's markets and look at things a little differently.
00:17.474 --> 00:20.117
[SPEAKER_00]: Audembrown is an independent Canadian investment firm.
00:20.697 --> 00:27.184
[SPEAKER_00]: We provide integrated wealth management solutions to help clients achieve their financial goals and we've been doing so for over a hundred years.
00:27.864 --> 00:31.708
[SPEAKER_00]: Join us for some lessons we've learned along the way that can make a difference for the future.
00:37.915 --> 00:38.936
[SPEAKER_02]: Hello and welcome.
00:39.016 --> 00:39.877
[SPEAKER_02]: I'm Stephen Boland.
00:40.598 --> 00:48.487
[SPEAKER_02]: We call this podcast different makes a difference because sometimes you have to act a little differently than the crowd to get a better result.
00:49.028 --> 00:49.929
[SPEAKER_02]: Doing so is hard.
00:50.490 --> 00:59.400
[SPEAKER_02]: First off you have to be different and right, but also it's emotionally hard to be different and it usually means you're going against a popular narrative.
00:59.380 --> 01:04.786
[SPEAKER_02]: Popular right now are stocks benefiting from the build-out of artificial intelligence processing.
01:05.066 --> 01:19.763
[SPEAKER_02]: We have long argued that investors should maintain some exposure to this theme, and we still believe that to be true, but we think the U.S. market has too much exposure for the average investor, and we recently recommended going further underweight AI.
01:20.384 --> 01:24.949
[SPEAKER_02]: And we changed the rating on three of our AI related stock recommendations to sell.
01:25.452 --> 01:36.748
[SPEAKER_02]: Vertive, GE, Vernova, and Chemical all served us and our clients extremely well going up between five and 15 times our initial recommendation price.
01:37.309 --> 01:44.760
[SPEAKER_02]: They're still good companies, but the risk and return on these and other AI-related stocks is not what it was.
01:44.740 --> 01:55.577
[SPEAKER_02]: So to talk about our view of AI-related stocks and why we're increasingly choosing to be different, I'm joined today by Alden Brown's Chief Investment Officer Marie Lee.
01:56.198 --> 01:56.839
[SPEAKER_02]: Welcome back Marie.
01:57.200 --> 01:57.660
[SPEAKER_01]: Hi Steven.
01:58.762 --> 02:04.812
[SPEAKER_02]: So Marie, let's start by sizing up the S&P 500 and that's the main U.S. stock index.
02:05.072 --> 02:08.437
[SPEAKER_02]: It's made up of 500 of America's largest companies.
02:09.299 --> 02:12.604
[SPEAKER_02]: If someone worked to buy an S&P 500 fun today,
02:12.837 --> 02:15.701
[SPEAKER_02]: How much AI exposure would they be taking on?
02:16.543 --> 02:18.185
[SPEAKER_02]: How much exposure should somebody have?
02:19.247 --> 02:36.973
[SPEAKER_01]: Well, there's lots of different ways to slice and dice it, but if you take the direct beneficiaries of the AI revolution and then all the indirect companies that participate in it, because it's not just the magnificent seven companies that are obviously benefiting from the AI revolution.
02:37.013 --> 02:42.321
[SPEAKER_01]: It's the utility companies that are growing faster
02:42.605 --> 03:08.410
[SPEAKER_01]: energy companies, both traditional and renewables are, you know, needed to power the AI compute the pipelines were hated a few years ago, but now people can see how we need to get more fuel to market to enlarge part because the power demands of AI are so
03:08.525 --> 03:15.314
[SPEAKER_01]: is a popular theme for a number of reasons, but the AI revolution is certainly one of the reasons that's fueling that.
03:15.574 --> 03:16.755
[SPEAKER_01]: We don't actually own a copper.
03:16.775 --> 03:24.986
[SPEAKER_01]: We own thinning as a sort of a surrogate plan on the on the copper narrative, albumo for batteries, but there's a lot of participation.
03:25.006 --> 03:32.355
[SPEAKER_01]: But more than 50% of the S&P 500 is either directly or indirectly benefiting from the AI revolution.
03:32.656 --> 03:41.613
[SPEAKER_01]: in our portfolio, we actually still have a lot of gearing towards AI, but it's more, it's about a third of our model portfolio.
03:41.674 --> 03:44.038
[SPEAKER_01]: So still a lot, but not more than half.
03:44.279 --> 03:44.399
[SPEAKER_01]: A.
03:44.459 --> 03:45.501
[SPEAKER_01]: So it has to be 500.
03:46.062 --> 03:48.066
[SPEAKER_02]: That's extreme concentration.
03:48.046 --> 03:55.096
[SPEAKER_02]: It kind of reminds of another time when the stock indexes became very concentrated in another theme.
03:55.296 --> 03:58.200
[SPEAKER_02]: In a different theme, it's an episode you know well.
03:58.260 --> 03:59.202
[SPEAKER_02]: You live through it.
03:59.482 --> 04:01.024
[SPEAKER_02]: I think you handled it quite well.
04:01.064 --> 04:04.870
[SPEAKER_02]: It was the technology media in the late 1990s.
04:05.431 --> 04:06.392
[SPEAKER_02]: And at the time,
04:06.828 --> 04:11.459
[SPEAKER_02]: Everybody wanted technology stocks and you were willing to be different at that time as well.
04:11.780 --> 04:14.126
[SPEAKER_02]: He told us a little bit about what was going on back then.
04:14.768 --> 04:24.752
[SPEAKER_01]: Yeah, I can, but you know, maybe I'll sort of back up a little bit and, you know, acknowledge that being different is tough and can't be stressful because you're often early.
04:24.732 --> 04:34.985
[SPEAKER_01]: And early for a lot of people is wrong, and if you're a couple of years too early, it is very much wrong, and it can be tough.
04:35.105 --> 04:45.137
[SPEAKER_01]: So earlier in May, the big hyperscalers, Amazon, Google, Microsoft, and Mata, they all reported their results in one day.
04:45.404 --> 05:07.193
[SPEAKER_01]: And there were awesome revenues were roughly 20% across the board, but their cloud businesses were all the AI activities going on reported even faster growth from 30% in Amazon's cloud all the way up to more than 60% in Google's cloud business with Microsoft in the middle just.
05:07.291 --> 05:09.734
[SPEAKER_01]: phenomenal growth rates for these businesses.
05:10.274 --> 05:19.305
[SPEAKER_01]: Everybody beat their expectations or the analysts expectations, they raise guidance, they reported bigger backlogs, and they all up their capital spending.
05:19.345 --> 05:27.935
[SPEAKER_01]: The four of them together are now expected to spend more than $700 billion this year, which is just a staggering number.
05:28.736 --> 05:29.637
[SPEAKER_02]: Absolutely.
05:29.768 --> 05:34.997
[SPEAKER_02]: I mean, we're often looking at companies that are growing 3, 4, 5% a year and 10% good.
05:35.398 --> 05:36.700
[SPEAKER_02]: And these are massive companies.
05:36.740 --> 05:38.303
[SPEAKER_02]: Generally, you mungus growth.
05:38.784 --> 05:39.465
[SPEAKER_01]: Absolutely.
05:39.565 --> 05:42.951
[SPEAKER_01]: So you asked me, you know, what was that like back then?
05:43.271 --> 05:48.060
[SPEAKER_01]: And see, you know, I certainly have lots of memories, but I can use AI now to sharpen those up.
05:48.080 --> 05:53.970
[SPEAKER_01]: So after those phenomenal results at the beginning of the May from those hyperscalers,
05:53.950 --> 06:13.153
[SPEAKER_01]: I was driving home and I dictated to anthropics clothes as I do often these days, and I said, I want you to pull the reports for Nortele and Cisco, which was the biggest company that was helping build the internet back at the turn of the century and some of the other players.
06:13.253 --> 06:15.696
[SPEAKER_01]: I said, pull their first quarter results from 2000.
06:16.137 --> 06:22.725
[SPEAKER_01]: I want to know what those look like and felt like, and the summary is that they were even more spectacular.
06:22.705 --> 06:25.007
[SPEAKER_01]: Nortale's revenues were up 50%.
06:25.267 --> 06:26.088
[SPEAKER_01]: Cisco's 55%.
06:27.309 --> 06:34.535
[SPEAKER_01]: JDS uniface, which was a, they did specially optical components that went into the fiber that powered the internet.
06:34.776 --> 06:35.897
[SPEAKER_01]: Their revenues were up 155%.
06:37.018 --> 06:45.505
[SPEAKER_01]: They all beat and raised their guidance, reported bigger backlogs, talked about capacity constraints that they couldn't keep up.
06:45.966 --> 06:52.071
[SPEAKER_01]: Point being rhymes a lot with what we heard
06:52.051 --> 07:09.148
[SPEAKER_01]: But, you know, the news was even more remarkable math and the point of bringing that up is that we know with hindsight that there was an absolute cliff around the corner that was, you know, the business is went on to get a report great results for the next couple of quarters, but into.
07:09.601 --> 07:20.299
[SPEAKER_01]: 2001 they fell off a cliff and there was no sign of that at the time, you know, Cisco's stock had already peaked at the time or tell with ultimately go bankrupt.
07:20.840 --> 07:29.735
[SPEAKER_01]: The the tech late in NASDAQ index experienced the peak to trough the decline of almost 80% in less than two years.
07:30.396 --> 07:34.343
[SPEAKER_01]: And it wasn't just technology stocks that had a rough ride back then.
07:34.323 --> 07:38.228
[SPEAKER_01]: you know following the effort for you that existed at the turn of the century.
07:38.729 --> 07:43.735
[SPEAKER_01]: America's biggest and best companies companies like Walmart, Johnson and Johnson and Coca-Cola.
07:44.156 --> 07:46.079
[SPEAKER_01]: They had crazy valuations as well.
07:46.699 --> 07:51.886
[SPEAKER_01]: Canadian who bought the S&P 500 index or an index fund at the end of 1999.
07:51.906 --> 07:57.353
[SPEAKER_01]: And Canadian dollars would have lost the third of their money over the following decade.
07:57.614 --> 08:03.081
[SPEAKER_01]: So
08:03.685 --> 08:08.008
[SPEAKER_01]: not for the people that are paid up for those stocks in the hate it.
08:08.073 --> 08:14.624
[SPEAKER_02]: an amazing story when you talk about the growth rate of these companies and the build out of the internet, which did indeed happen.
08:14.985 --> 08:19.994
[SPEAKER_02]: It only made sense to buy these things and it turned out to be an absolute disaster of an investment.
08:20.595 --> 08:30.071
[SPEAKER_02]: I find it interesting you've been telling a story around here recently about a belief back then that the internet was doubling every hundred days.
08:30.672 --> 08:33.878
[SPEAKER_02]: Share that story and what kind of lessons are you drawing from that?
08:34.162 --> 08:58.313
[SPEAKER_01]: Yeah, it came out out of the scraping of the results from 2000 that I did with the help of AI and one of the things that it served up was that the CEO of Cisco, John Chambers had remarked on the conference call that the internet was doubling every hundred days and so I pulled on that and said, well, where did that come from and it's a pretty fascinating story where it came from.
08:58.613 --> 09:05.223
[SPEAKER_01]: was from an engineer at a company called UU Matt, which was a subsidiary of WorldCom.
09:05.984 --> 09:14.336
[SPEAKER_01]: And WorldCom of course, went on to be the largest bankrupt sand fraud in American history in 2002.
09:15.497 --> 09:27.034
[SPEAKER_01]: It was a company that built the backbone of the internet around the world, the fibrofic cables that circle the worlds and carried that internet traffic
09:27.520 --> 09:38.618
[SPEAKER_01]: and they grew by acquisition and it turned out they had some pretty fraudulent accounting treatments and we're telling a story that just wasn't true and and they're CEO ultimately went to jail for that sin.
09:39.239 --> 09:55.384
[SPEAKER_01]: But the subsidiary company there was an engineer that was tasked by his boss to build a model, a spreadsheet, modeling out various demands scenarios so that they would know how to provision traffic on their network that they were building quickly around the world.
09:55.921 --> 10:01.446
[SPEAKER_01]: And the 100 day, the doubling every 100 days was merely the optimistic scenario.
10:02.367 --> 10:05.850
[SPEAKER_01]: But from there, WorldCom was in the business of selling bandwidth.
10:06.471 --> 10:10.235
[SPEAKER_01]: And so that made its way into their marketing material.
10:10.275 --> 10:16.501
[SPEAKER_01]: And before you knew it, it was repeated by the heads of AT&T and BCE.
10:16.641 --> 10:23.127
[SPEAKER_01]: And it got written into government reports on the digital regulatory evolution.
10:23.461 --> 10:29.473
[SPEAKER_01]: the former chair of the federal communications commissions even wrote a book and it was in there.
10:29.513 --> 10:30.695
[SPEAKER_01]: So it became gospel.
10:31.276 --> 10:32.017
[SPEAKER_01]: But it was wrong.
10:32.498 --> 10:38.229
[SPEAKER_01]: The really interesting thing is that 2000 was the peak in belief.
10:38.249 --> 10:42.718
[SPEAKER_01]: But most of the really great things that came from the internet,
10:42.698 --> 10:53.097
[SPEAKER_01]: Didn't come for, and until years later, people knew that it was going to change the world that truly did, but, you know, most of the modern internet was introduced way after that.
10:53.117 --> 10:57.245
[SPEAKER_01]: And I've got some examples, you know, Google went public in 2004.
10:58.266 --> 11:00.270
[SPEAKER_01]: Facebook was launched the same year.
11:00.330 --> 11:03.576
[SPEAKER_01]: YouTube didn't come out until 2005.
11:03.556 --> 11:12.507
[SPEAKER_01]: Twitter, 2006, as well as Amazon web services at same year, which is their cloud business is growing wonderfully right now.
11:12.748 --> 11:13.348
[SPEAKER_01]: The iPhone.
11:13.889 --> 11:27.927
[SPEAKER_01]: In the middle of the decade, we all talked about our crack barriers and thought that we'd be using those forever, but they were just texting machines at the beginning of the decade, but the iPhone came out in 2007, same year that Netflix started streaming video.
11:27.907 --> 11:34.658
[SPEAKER_01]: And the Apple I started and opened until 2008, and Uber was introduced to the world in 2009.
11:35.179 --> 11:39.566
[SPEAKER_01]: So, you know, the belief that the internet was going to change the world was dead right.
11:40.327 --> 11:43.452
[SPEAKER_01]: But what came next, succeeded in our wildest imagination.
11:43.567 --> 11:54.537
[SPEAKER_01]: But the lesson is that investors got out over the skis and they lost, you know, paint too much for these wonderful companies that we're going to change the world they did, but they paid too much and they lost a bundle.
11:54.757 --> 11:55.519
[SPEAKER_01]: That's the lesson.
11:56.000 --> 11:57.625
[SPEAKER_02]: What's that Mark Twain quotes?
11:57.986 --> 11:59.550
[SPEAKER_02]: I can't remember it off the top of my head.
11:59.817 --> 12:01.920
[SPEAKER_01]: It ain't what you don't know that gets you in trouble.
12:02.421 --> 12:04.525
[SPEAKER_01]: It's what you know for sure that just ain't so.
12:05.286 --> 12:12.358
[SPEAKER_01]: And the irony with that quote is that it's been misattributed to him and I don't know who actually said it.
12:12.418 --> 12:13.420
[SPEAKER_01]: It's a great quote.
12:13.440 --> 12:17.927
[SPEAKER_01]: It drives our thinking all the time, but he didn't actually say it.
12:19.443 --> 12:24.512
[SPEAKER_02]: So, sticking with the late 90s here, what eventually killed the bubble?
12:24.772 --> 12:26.355
[SPEAKER_02]: These were very popular stocks.
12:26.395 --> 12:29.962
[SPEAKER_02]: They came crashing down, what went on, what was the cause of it?
12:30.703 --> 12:34.129
[SPEAKER_01]: It was actually technology that killed the bubble, ironically.
12:34.951 --> 12:37.435
[SPEAKER_01]: You know, internet infrastructure got overbuilt.
12:37.837 --> 12:54.377
[SPEAKER_01]: part because people thought the internet demand was growing faster than it was, but the bigger reason for the collapse was the the absolute drop in the cost of bandwidth moving data around the world, the price of doing that, absolutely collapse because of
12:55.049 --> 12:57.373
[SPEAKER_01]: of technological advancements.
12:57.773 --> 13:02.781
[SPEAKER_01]: And we laid all this fiber to move internet data around the world initially.
13:02.941 --> 13:07.147
[SPEAKER_01]: You know, those fiber off the cables just carried away like the light.
13:07.528 --> 13:10.572
[SPEAKER_01]: And that's how they moved the data around.
13:10.893 --> 13:16.281
[SPEAKER_01]: But then they learned how to send dozens of wavelengths down the same pipe.
13:16.598 --> 13:17.539
[SPEAKER_01]: with different colors.
13:18.060 --> 13:20.844
[SPEAKER_01]: And then it was 50 different wavelengths.
13:20.924 --> 13:23.488
[SPEAKER_01]: And so they kept on developing new technologies.
13:23.528 --> 13:26.252
[SPEAKER_01]: That's what the Nortels are the worlds and the CISCOs are the world.
13:26.292 --> 13:31.419
[SPEAKER_01]: We're figuring out how to turn like four lane highways into like 50 lane freeways.
13:32.120 --> 13:38.910
[SPEAKER_01]: And so not only were we laying a lot of fiber, but we were improving increasing the capacity.
13:39.127 --> 13:42.433
[SPEAKER_01]: to push traffic down those networks tremendously.
13:42.453 --> 13:45.097
[SPEAKER_01]: And so the price of bandwidth dropped like 95%.
13:45.578 --> 13:50.887
[SPEAKER_01]: So the people had invested in the initial networks, couldn't get a return on their investment.
13:50.927 --> 13:55.575
[SPEAKER_01]: And so we ultimately used all of that bandwidth.
13:55.675 --> 13:59.722
[SPEAKER_01]: And we had lots to grow into, but we had way more than we needed early on.
13:59.922 --> 14:03.328
[SPEAKER_01]: And that's what really killed the party.
14:04.000 --> 14:05.942
[SPEAKER_01]: You know, the big constraint today is power.
14:06.242 --> 14:09.946
[SPEAKER_01]: We don't have enough to build data centers at the rate that we want to.
14:10.447 --> 14:13.750
[SPEAKER_01]: But there's a mad scramble to add all sorts of power.
14:14.070 --> 14:20.657
[SPEAKER_01]: You know, natural gas as seen as the bridge in fuel, that's why GE for NOVA has been such a hot stock.
14:20.677 --> 14:24.681
[SPEAKER_01]: They make the turbines that generate electricity from that natural gas.
14:25.061 --> 14:26.743
[SPEAKER_01]: There's been a nuclear renaissance.
14:26.823 --> 14:30.767
[SPEAKER_01]: And that's why Camico has been just a spectacular stock.
14:30.747 --> 14:32.549
[SPEAKER_01]: You know renewables.
14:33.450 --> 14:39.517
[SPEAKER_01]: The world's been investing more and more and renewables and the need for them is even greater with this AI revolution.
14:39.657 --> 14:45.224
[SPEAKER_01]: It's sort of all of the about, you know, unfortunately and sadly, the world's embracing cool again.
14:45.264 --> 14:56.798
[SPEAKER_01]: We were shutting down coal plans, but we're delaying that now and so there's a race to increase our energy capacity as much as possible to feed this AI revolution.
14:57.278 --> 14:58.780
[SPEAKER_01]: But, you know,
14:59.435 --> 15:02.323
[SPEAKER_01]: You will figure out how to make.
15:02.506 --> 15:31.635
[SPEAKER_01]: the chips and the compute more efficient and they're doing it every day like they're making tremendous a headway so far you know demands growing faster than the technological advancements can keep up I'm certain that at some point boom will be followed by bust you know the top part is we don't know when you know is it gonna happen this year is it gonna happen 510 years down the road and that's what we're anxious about I'm anxious about it when I'm underweight
15:31.615 --> 15:40.471
[SPEAKER_01]: But the valuations of some of these companies are, you know, they're discounting an expectation that demand is flies going to remain tight forever.
15:40.712 --> 15:42.475
[SPEAKER_01]: And that's not the lesson from history.
15:42.715 --> 15:51.852
[SPEAKER_01]: Every technological revolution has had a boom boss cycle for the exact same reasons, you know, we've been talking about.
15:52.439 --> 16:14.245
[SPEAKER_02]: Okay, so you mentioned that you don't know when this is going to end, you didn't know when it was going to end in the late 90s either, but I think there were some warning signs that you were seeing that made you go underweight technology, not own nor tell, for example, what were those warning signs and are there any parallels there to what we're seeing today?
16:14.748 --> 16:40.907
[SPEAKER_01]: Yeah, there were warning signs and in your right, we didn't own Nortale, but we did own a company called Alcatel, which was the French counterpart to Nortale that made telecom equipment and they were going about as fast as Nortale, but they traded at half the valuation multiple 35 times earnings instead of 70 is what I remember and there was two things that happened that I was getting nervous with the valuations and wondering when we were going to.
16:41.326 --> 16:46.067
[SPEAKER_01]: you know, transition to some other shocks that were better value at the time.
16:46.107 --> 16:47.674
[SPEAKER_01]: And I had woken up.
16:48.262 --> 16:56.075
[SPEAKER_01]: one day and read the paper and read about the TD dividend income fund that have a third of their portfolio invested in Norteau.
16:56.796 --> 16:58.559
[SPEAKER_01]: Norteau barely paid a dividend.
16:58.579 --> 17:00.182
[SPEAKER_01]: It was like 0.009%.
17:01.564 --> 17:09.056
[SPEAKER_01]: And he thought, well, when it dividend fund, a big dividend fund has a third of the portfolio and a business that doesn't really pay a dividend.
17:09.077 --> 17:10.339
[SPEAKER_01]: Who's left by the stock?
17:10.419 --> 17:11.541
[SPEAKER_01]: So that was number one.
17:12.061 --> 17:14.826
[SPEAKER_01]: And number two was, I remember reading about a
17:14.806 --> 17:18.092
[SPEAKER_01]: a bond conference or a fixing call conference in New York.
17:18.593 --> 17:27.950
[SPEAKER_01]: And a speaker there had surveyed the crowd and said, who's going to invest in the telecom companies that are financing this huge bills out of the internet?
17:28.251 --> 17:30.054
[SPEAKER_01]: And nobody put up their hand.
17:30.074 --> 17:32.899
[SPEAKER_01]: And I thought, you know, that's a real sign that parties over.
17:32.879 --> 17:54.567
[SPEAKER_01]: everybody's already bought and the people that are financing this are done and there's another I think lesson in this is that the memory that we all have and certainly it was the memory that that I had until I started to think about it and just that the trigger for the collapse was the bond market refusing to lend to these startup telco companies.
17:54.547 --> 18:00.098
[SPEAKER_01]: You know, the incumbents we're doing it too, but there are so many start-out companies that were raising money hand over fast.
18:00.459 --> 18:02.763
[SPEAKER_01]: And when the bond markets have, we're not giving you money anymore.
18:02.803 --> 18:12.522
[SPEAKER_01]: Well, that meant they couldn't buy equipment from Nortella's Lucent and all these companies, but the demise of those companies was the symptom.
18:12.502 --> 18:20.700
[SPEAKER_01]: And the collapse of the telecom, the incumbent telecom company share prices was another symptom.
18:20.720 --> 18:23.607
[SPEAKER_01]: The disease was the technological advancements.
18:24.028 --> 18:30.061
[SPEAKER_01]: The collapse in the price of bandwidth, the deterioration and the economics of building the internet.
18:30.101 --> 18:31.725
[SPEAKER_01]: People couldn't get a return on that.
18:31.705 --> 18:42.619
[SPEAKER_01]: And here now, we find some comfort that the people finance in the AI or revolution, primarily, are these big companies, the Microsoft, the Amazon and whatnot.
18:43.040 --> 18:48.747
[SPEAKER_01]: And they are amazing companies, their diverse businesses, they're not going to go bankrupt.
18:49.128 --> 18:50.249
[SPEAKER_01]: They're going to be around forever.
18:50.490 --> 18:52.953
[SPEAKER_01]: And that's part of the reason why we still own them.
18:52.973 --> 18:58.540
[SPEAKER_01]: But they're not the businesses that they
18:58.705 --> 19:02.730
[SPEAKER_01]: They're free cash flow is going down because they're making all these investments right now.
19:02.751 --> 19:07.337
[SPEAKER_01]: Now, there will be a payoff, but how long will it take to come and how big will it be?
19:07.377 --> 19:08.699
[SPEAKER_01]: They're not borrowing.
19:08.919 --> 19:10.461
[SPEAKER_01]: They used to have piles of cash.
19:10.902 --> 19:15.047
[SPEAKER_01]: So the multiple that investors will pay for them will not be as high.
19:15.388 --> 19:20.835
[SPEAKER_01]: That's why they're not as valued as sky-high as the Norteils were at the turn of this entry.
19:21.496 --> 19:25.101
[SPEAKER_01]: But what we need to watch is the economics.
19:25.081 --> 19:44.052
[SPEAKER_01]: of building these data centers and whether or not didn't man will continue to strip the technological advancements and we're not there yet, but we don't know where that's coming but we've got to be careful about the price that we pay for that to make sure that our clients get a return on their investment so that's what we're focused on.
19:44.588 --> 19:59.206
[SPEAKER_02]: I wanted to touch as well on circular financing and something we've talked about before on this podcast, but just remind us why you saw the late 90s around circular financing and why you're seeing today and maybe just start what is circular financing?
19:59.547 --> 20:01.529
[SPEAKER_01]: It's what's going on in this area.
20:01.549 --> 20:05.955
[SPEAKER_01]: There's something a little different that rhymes with it from the internet revolution.
20:06.408 --> 20:18.732
[SPEAKER_01]: But what's going on right now is the suppliers of the technology or investing equity into their customers and the customers are buying from the suppliers with that money.
20:19.233 --> 20:25.986
[SPEAKER_01]: Invidia invests in their customers and their customers turn around to buy Nvidia chips, Microsoft.
20:25.966 --> 20:30.414
[SPEAKER_01]: invests billions into open AI, which is chatGBT.
20:30.474 --> 20:35.883
[SPEAKER_01]: And then open AI turns around and buys compute from Microsoft's cloud business.
20:35.963 --> 20:42.575
[SPEAKER_01]: And so there's a lot of this sort of circular finance inner investment going on and it helps perpetuate.
20:42.595 --> 20:44.698
[SPEAKER_01]: It's good for everybody in the chain.
20:45.339 --> 20:48.284
[SPEAKER_01]: And that wasn't so much of what was happening.
20:48.304 --> 20:49.847
[SPEAKER_01]: There was a little bit of that happening.
20:50.165 --> 20:56.494
[SPEAKER_01]: at the turn of the century and the internet revolution, but what was happening more was vendor financing.
20:57.074 --> 21:02.622
[SPEAKER_01]: So, nor tell when a equipment to a startup helco and say, you know, what?
21:02.642 --> 21:12.055
[SPEAKER_01]: You can pay us once your business starts maturing and you have cash flow and unfortunately for an hotel, those businesses never came to, you know, never flourished.
21:12.415 --> 21:15.379
[SPEAKER_01]: So they ultimately weren't able to pay that money back.
21:15.359 --> 21:26.449
[SPEAKER_01]: And the magnitude of this circular financing that's going on today, it's similar in size to the scale of the vendor financing that was going on.
21:26.750 --> 21:27.391
[SPEAKER_01]: back then.
21:27.491 --> 21:31.136
[SPEAKER_01]: So it's, it's a bit of a flag on the field, something that we're watching.
21:31.176 --> 21:36.783
[SPEAKER_01]: The players in this game, they're, they're all very well capitalized and funded.
21:37.244 --> 21:44.032
[SPEAKER_01]: But, you know, the Anthropics and OpenAI's, they constantly have to go back to the market for, for more point by an aunts.
21:44.072 --> 21:50.040
[SPEAKER_01]: And, you know, I think the worry is that, you know, this build out of data centers and,
21:50.020 --> 21:51.463
[SPEAKER_01]: AI will do for the world.
21:51.483 --> 21:52.926
[SPEAKER_01]: We'll continue for a long time.
21:53.146 --> 22:07.413
[SPEAKER_01]: But, you know, some of the companies that are participating in the hottest stocks, the virtuos that do the cooling and power systems for the data centers of the GE, for novos, or the chemicals that we've talked about, they're susceptible.
22:07.473 --> 22:09.497
[SPEAKER_01]: Their valuations are very high.
22:09.848 --> 22:16.960
[SPEAKER_01]: and if these hyperscalers, the Microsoft, the Amazon, the Google's, like take their foot off the accelerator, it's just a bet.
22:17.581 --> 22:28.920
[SPEAKER_01]: I think those are the kind of stocks, if the experience at the turn of the century is a guide post, those things could hit a huge air pocket, you know, just when those guys decide it's time to,
22:28.900 --> 22:36.096
[SPEAKER_01]: You know, still build it out, but slow it down, those things I think could drop like 30, 40, 50% in short order.
22:36.336 --> 22:38.281
[SPEAKER_01]: And that's why we've moved on from them.
22:38.802 --> 22:40.145
[SPEAKER_01]: And it's tough, though.
22:40.165 --> 22:42.430
[SPEAKER_01]: Like, because they keep running in the short term.
22:42.450 --> 22:47.922
[SPEAKER_01]: And you know, we can talk about, you know, our experience back at the turn of the century with some of that.
22:48.239 --> 22:56.953
[SPEAKER_02]: Yeah, I just want to pick up on the valuation point there and just to put vertive into context for people when we recommended vertive and I think it was 2021.
22:58.295 --> 23:00.158
[SPEAKER_02]: It was earned about a dollar earnings per share.
23:00.678 --> 23:01.800
[SPEAKER_02]: And we saw the potential.
23:01.820 --> 23:10.193
[SPEAKER_02]: I can probably get to three dollars and if this is a stock that can trade 15 to 20 times earnings, you got a $45 to $60 stock.
23:10.213 --> 23:12.036
[SPEAKER_02]: The stock was $20.
23:12.016 --> 23:18.586
[SPEAKER_02]: And then AI came along and all of a sudden, oh, there was the potential to get the $7 or $8 per share.
23:19.047 --> 23:21.350
[SPEAKER_02]: It's like, okay, well, you give 20 times on that.
23:21.651 --> 23:26.618
[SPEAKER_02]: You'd have $150, $200 share price, and now there's a bullcase of $11.
23:27.039 --> 23:29.042
[SPEAKER_02]: It's even getting thrown $20 out there.
23:29.823 --> 23:32.287
[SPEAKER_02]: And this is a stock that's trading for $150.
23:33.288 --> 23:36.373
[SPEAKER_02]: So all of a sudden, you say, this was a company earning $1.
23:36.393 --> 23:40.960
[SPEAKER_02]: And now there's this bullcase, we don't know if they can get to it,
23:40.940 --> 23:45.887
[SPEAKER_02]: Well, it's already factoring in the bullcase, and there's a whole lot of downside if that doesn't come about.
23:46.508 --> 23:50.934
[SPEAKER_01]: And I'd remind you, because you're the guy that was covered that name, recommended it at 20.
23:51.375 --> 24:00.348
[SPEAKER_01]: But it fell in half before it went on this huge end when, you know, so it's been a 15 bag or more than a 15 bagger from our initial cost.
24:00.528 --> 24:10.002
[SPEAKER_01]: But it's it's been like a 30 bagger plus from the low, and they of course had a stumble when the inflation from the pandemic hit and they hadn't
24:10.403 --> 24:13.390
[SPEAKER_01]: and they didn't have inflation escalators in their contract.
24:13.430 --> 24:18.301
[SPEAKER_01]: So, but that's a reminder that, you know, these things can go from absolutely loved.
24:18.401 --> 24:25.277
[SPEAKER_01]: And you have to be thinking differently than the crowd at those junctures or else you can get really hurt.
24:25.437 --> 24:25.678
[SPEAKER_01]: Yeah.
24:25.658 --> 24:45.097
[SPEAKER_02]: It paid for a long time writing the valuation higher, and we did that on a lot of stocks over the last number of years, not just vertive, but I think you're worried that maybe writing higher price stocks won't be as lucrative as it had been in past years that the valuation might make more of a difference going forward.
24:45.117 --> 24:46.620
[SPEAKER_02]: Can you expand on that point?
24:46.600 --> 24:55.552
[SPEAKER_01]: Yeah, it's something that's very much on our mind and for most of my career or for all of my career, we lived in a disinflationary environment.
24:55.712 --> 25:02.741
[SPEAKER_01]: What disinflation is, as opposed to outright deflation, it just means lower and lower inflation over time.
25:02.781 --> 25:07.968
[SPEAKER_01]: An inflation peaked in the early 80s, and it didn't bottom until the pandemic.
25:07.988 --> 25:16.219
[SPEAKER_01]: But as that happened, the inflation has a huge influence on
25:16.638 --> 25:22.767
[SPEAKER_01]: drops in mortgage rates, have a positive influence on home prices, same thing happens with all assets.
25:22.847 --> 25:33.341
[SPEAKER_01]: And so this 40-year period of this inflation group drove higher and higher valuations, the biggest beneficiaries of higher valuations are your growth stocks.
25:33.482 --> 25:45.919
[SPEAKER_01]: Because they report better things far into the future and the lower the interest rate or the discount rates, the more value well those future earnings are.
25:45.899 --> 25:46.620
[SPEAKER_01]: for decades.
25:47.081 --> 25:48.503
[SPEAKER_01]: But we're on the other side of that.
25:48.583 --> 25:55.315
[SPEAKER_01]: We're in a different regime, a different era, where I think we're going to be living with higher inflation.
25:55.375 --> 25:59.362
[SPEAKER_01]: I'm not saying run away inflation, but higher inflation in generally higher interest rates.
25:59.902 --> 26:06.253
[SPEAKER_01]: And that puts the popular growth stocks that have the higher valuations at risk.
26:06.487 --> 26:11.054
[SPEAKER_01]: of those valuation multiples contracting after decades of watching them expand.
26:11.494 --> 26:22.150
[SPEAKER_01]: And so for the better part of the last two years, we've quietly been rotating out of the more expensive names and the names that we've sold most recently are among the most expensive.
26:22.691 --> 26:35.970
[SPEAKER_01]: And we still want to own businesses that can grow, but we're much more conscious of the price that we pay for those businesses today because of that inflation and interest rate backdrop.
26:35.950 --> 26:45.984
[SPEAKER_01]: They live their whole life under a different regime and we understand the relationship and how the world works in that world, but we're not in that world anymore, so we have to think differently.
26:46.505 --> 26:47.286
[SPEAKER_02]: Really hard to do.
26:47.466 --> 26:51.032
[SPEAKER_02]: I mean, it's hard to get off the bus on something that's been treating you well.
26:51.552 --> 26:56.900
[SPEAKER_02]: I know I've been selling down some of my AI winners like Vertif and it kills me to look at the tax bill.
26:56.920 --> 26:58.222
[SPEAKER_02]: I'm going to have at the end of the year.
26:58.262 --> 27:00.405
[SPEAKER_01]: How do you get around things like that?
27:00.959 --> 27:09.032
[SPEAKER_01]: Well, it's true and I, you know, I can say earlier on in my career, you know, I was a young analyst and I didn't have a big portfolio.
27:09.112 --> 27:27.861
[SPEAKER_01]: So I could think about these things more objectively and, you know, older and later in my career and fortunately I have a decent portfolio, but the unfortunate thing of things working out well and holding a bunch of great companies for many, many years is that I like a lot of other people have these huge capital gains and I don't want to pay
27:27.841 --> 27:37.279
[SPEAKER_01]: the tax mat, but maybe a little retrospective here to shed some light on just how that influences people.
27:38.241 --> 27:44.033
[SPEAKER_01]: Back in 2000, Nortelle was our firm's biggest position and he might say, well, how could that be?
27:44.433 --> 27:45.816
[SPEAKER_01]: You weren't even recommending it.
27:46.537 --> 27:48.381
[SPEAKER_01]: But BCE,
27:48.766 --> 27:57.338
[SPEAKER_01]: had been our biggest position and which was a perfect stock for conservative investors because they paid a big dividend, they grew that dividend year and year out.
27:57.398 --> 28:01.184
[SPEAKER_01]: And so it was our biggest position, but they also owned a chunk of Norteau.
28:01.665 --> 28:05.130
[SPEAKER_01]: And they spun that out to investors in early 2000.
28:05.150 --> 28:11.719
[SPEAKER_01]: And so Norteau became our biggest position in starting in June of 2000 through to June of 2001.
28:12.222 --> 28:15.065
[SPEAKER_01]: I wrote 12 cell reports on Nortale.
28:15.766 --> 28:19.429
[SPEAKER_01]: And I think we only sold about 5% of our position.
28:19.690 --> 28:22.533
[SPEAKER_01]: Like people didn't want to pay the tax.
28:23.153 --> 28:34.124
[SPEAKER_01]: And one of the points is that maybe it was easier for me to do that earlier in my career, where I didn't have skin in the game, and I didn't have a big portfolio with a bunch of capital gains.
28:34.205 --> 28:40.491
[SPEAKER_01]: And so it was easier to serve up the objective advice on, we should really move on from this thing.
28:40.471 --> 28:59.796
[SPEAKER_01]: Whereas it's harder and you know, we started buying America's biggest best companies in the mid 2000s and so, you know, a lot of them we've been holding for, you know, upwards of two decades and not all of them, but we've been building capital gains and a lot of these great companies and, you know, most of the times you just want to hold.
28:59.776 --> 29:12.958
[SPEAKER_01]: great companies people can figure out what are the great companies and you know warm buffets says buy the S&P 500 index just hold that forever and that's great advice almost all of the time but every once in a while.
29:13.512 --> 29:19.504
[SPEAKER_01]: be a for you the belief in these businesses gets two grand and the valuations get too high.
29:19.845 --> 29:24.574
[SPEAKER_01]: That happened in the early 70s with a group of stocks called the nifty 50.
29:24.594 --> 29:31.909
[SPEAKER_01]: It happened at the turn of the century, not just with the tech at the internet revolution, but with America's biggest and best companies.
29:31.889 --> 29:45.710
[SPEAKER_01]: And I think exists today, not as bad as it was at the turn of the century, but I think it's the time that we have to be, you know, we have to move on from some of these stocks that treated us very well and look for better value outside of the spotlight.
29:45.730 --> 29:47.252
[SPEAKER_01]: And so that's what we've been telling clients.
29:47.833 --> 29:49.476
[SPEAKER_02]: So where are you finding better value?
29:50.477 --> 29:54.403
[SPEAKER_01]: Well, our biggest overweight is energy and you know,
29:54.890 --> 30:12.747
[SPEAKER_01]: We were overweighted before the Iran war and sometimes you know that's a sad way to get lucky, but that's certainly has helped because it was one area of the market that people still really hated and these companies had gotten a lot more disciplined and the way they handled shareholder money, they were
30:13.182 --> 30:26.019
[SPEAKER_01]: giving a lot more money back to share holders view vis-a-vis dividends or stock buybacks, their balance sheets were better, and their valuation, Sarah generating lots of free cash flow, and you weren't having to pay up for it.
30:26.340 --> 30:30.305
[SPEAKER_01]: People were worried about a glut of oil in the near-term this year.
30:30.665 --> 30:34.110
[SPEAKER_01]: Those worries of course have all gone away, let's get closer to the straight-up
30:34.445 --> 30:41.255
[SPEAKER_01]: for a moose, but there's a tight correlation to global growth and energy consumption, all types of energy.
30:41.275 --> 30:47.724
[SPEAKER_01]: And I think we're all learning that oils and input to a lot of the products that we use in every day lives.
30:47.824 --> 30:54.634
[SPEAKER_01]: And we all want to wean our cells off of that and build renewables and reinvest in renewables as well.
30:54.914 --> 30:57.998
[SPEAKER_01]: And that will continue to grow and importance.
30:58.519 --> 31:01.363
[SPEAKER_01]: It's an area of the market that we think people are,
31:01.597 --> 31:10.587
[SPEAKER_01]: Even today, still too cautious that the systemic conductor part of the S&P 500 is like 17% today.
31:11.288 --> 31:13.631
[SPEAKER_01]: Energy is like three or four percent.
31:14.071 --> 31:19.858
[SPEAKER_01]: It's the complete opposite of where things were in 2007 before the financial crisis.
31:19.938 --> 31:24.944
[SPEAKER_01]: Back then, energy was 17% of that index and semiconductors were four.
31:25.765 --> 31:30.490
[SPEAKER_01]: And we're much more comfortable being in the far less crowded trade.
31:30.976 --> 31:32.058
[SPEAKER_02]: That makes a lot of sense.
31:32.138 --> 31:33.621
[SPEAKER_02]: I think that's a good place to end it.
31:33.841 --> 31:35.464
[SPEAKER_02]: Thanks for joining today, Murray.
31:35.484 --> 31:40.394
[SPEAKER_02]: I think the parallels you're drawing to the late 1990s are quite interesting.
31:40.935 --> 31:44.361
[SPEAKER_02]: You know, the build out of the internet did indeed change the world.
31:44.780 --> 31:50.847
[SPEAKER_02]: But many investors lost a lot of money owning wildly popular stocks when that investment cycle turned.
31:51.628 --> 31:55.772
[SPEAKER_02]: Today, the US market has high exposure to AI-related stocks.
31:56.353 --> 31:59.697
[SPEAKER_02]: Certainly, some exposure is fine, but keep it measured.
32:00.217 --> 32:02.540
[SPEAKER_02]: The stocks are popular and there are risks.
32:02.960 --> 32:13.352
[SPEAKER_02]: It's emotionally hard to be different to risk missing out on a popular theme, but it increasingly seems like we're at one of those times when being different will make a profitable difference.
32:13.332 --> 32:14.553
[SPEAKER_02]: Thanks everyone for listening.
32:14.954 --> 32:16.315
[SPEAKER_02]: We look forward to talking again soon.
32:19.959 --> 32:23.103
[SPEAKER_00]: Thank you for listening to another episode of Different Makes a Difference.
32:23.723 --> 32:27.267
[SPEAKER_00]: Just as every individual is unique, so are your financial circumstances.
32:27.888 --> 32:31.812
[SPEAKER_00]: Be sure to talk to your professional advisors for advice related specifically to you.
32:31.872 --> 32:36.057
[SPEAKER_00]: Our podcast is for general information purposes for Canadians only.
32:36.097 --> 32:41.483
[SPEAKER_00]: The views expressed are those of the presenters and may not reflect the opinions of Autumn Brown.
32:41.463 --> 32:47.846
[SPEAKER_00]: Be sure to check out our full disclaimer and subscribe to the podcast at AudlandBrown.com slash different makes a difference.
32:48.670 --> 32:51.540
[SPEAKER_00]: AudlandBrown is a member of the Canadian Investor Protection Fund.
