Are Buybacks Distorting Stock Prices?

[00:00:00] This is the Canadian Investor where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Braden Dennis and Simon Belanger. The Canadian Investor podcast, welcome to the show, my name is Braden Dennis as always

[00:00:20] joined by the powerful Simon Belanger. Happy Canada Day, this episode is coming out on Canada Day. So hope everyone had a great long weekend, enjoy that July heat. Mr Belanger, today we have two segments, you and I both have a segment that we're going

[00:00:43] to go through and then our world famous world renowned stocks on our watch list presented by our friends at EQ Bank. And as coming up, I'm doing something a little off the beaten path for my segment and then you have a Canadian stock we're going to talk about.

[00:01:00] Yeah. Who wants to go first? I think we both have a pretty decent segment out of the gate here. How should we go? You go for it while my Tom, all sinus kind of acts a little bit and I cough a bit less.

[00:01:13] Were you wearing that hat with the Dan recording that you just did? I was for a little bit but I took it off midway because I was like it felt like my head was getting hotter and hotter. The FTX risk management hat is all time.

[00:01:29] Did you coordinate with Dan Foch for that one because he's got all of the bankrupt company hats? Yeah, I think he gets the official ones when they basically go bankrupt. The official.

[00:01:40] Yeah, the official air cold but this is more of a meme hat I would say and my trick is to wear it for a couple of weeks and just see how many people actually comment on it because we're in this little financial world, right?

[00:01:56] That's what we pay the most attention to so that's most people would know what it is but I'm just curious to see regular people on the street. How many notice it or look at it and figure it, know what it is. That's my little experiment.

[00:02:11] Maybe I'll report back at the end of July for that. I go to a lot of FinTech conferences and I feel like that would be a great hat because conferences are so serious and people just want to have conversations with people that they like and not so serious.

[00:02:28] That just sets the tone right away. Look at the FTX risk management hat on, here we go. My first segment is called Speaking in Absolutes. Speaking in Absolutes means saying things like impossible, never, always.

[00:02:47] That type of wording and language and ultimately thinking, speaking in those type of certain ways or what people call absolutes can be detrimental to an investment thesis. It favors biases and ultimately you overlook risks. Like Simon, FTX could never go bankrupt.

[00:03:08] Sandbank and Frid is the smartest guy ever. They are inevitable. They're always going to be around. Them going bankrupt is impossible. You know one thing that's one quote that comes to mind if people are a Star Wars fan,

[00:03:26] I think I can't remember who it is but I think it's Obi-Wan Kenobi who says in one of the movies only sits, think in absolutes. I think he was talking to Anakin Skywalker when he was changing over. But anyways, I digress. Only sits, speaks in absolutes.

[00:03:42] That's a banger of a quote. I like that. And it speaks exactly what I'm talking about here. Let's look at a real life example here and then you can chime in but I'm a shareholder of both Visa and MasterCard stock. I think you are as well. Yeah. Both?

[00:04:03] I have been since March 2020 when I actually kind of bottom ticked them in the COVID crash. That was one of my better moves. I think these are two of the highest quality businesses you can find. From a margin perspective, look no further.

[00:04:18] There's them and then there's everyone else. It's truly exceptional. And if I were to say something like it is impossible to disrupt their business, they will always be the dominant way to facilitate transactions in the world between consumers and merchants.

[00:04:35] Salesforce is always going to be the dominant CRM plan platform. That's not an investment thesis. Nvidia will always be the leaders in GPUs is not an investment thesis. How about Nvidia has a huge? It seems to be for a lot of people right now. It sure is.

[00:04:56] How about this? Nvidia has a huge advantage over the competition with their GPU technology and their CUDA software layer gives them high switching costs and enduring competitive advantages. It gives them the full vertically integrated stack between the software layer and the hardware layer with their CUDA compiler.

[00:05:18] It's very unlikely for competitors to catch up and now that they're building on top of this, they have this huge moat that they're building. That's an investment thesis saying that is impossible to disrupt them and AMD, whoever

[00:05:31] else or company yet to be seen will never come and disrupt them. That's not an investment thesis. This has nothing to do with Nvidia, Salesforce, Visa or MasterCard. These are just examples. Once you have an actual core thesis you can invest from like maybe that second one

[00:05:47] of course valuation and other things are going to come into play here but now you have a foundation to work from. Now you're thinking in probabilities rather than absolutes. The absolute thinking sets myself up for disaster from the get-go.

[00:06:02] It sets you up for disaster because that language overlooks risk that may exist and probably do exist. The reality is that the world changes. The world forces, technological advancements, new competitors, new regulations, etc.

[00:06:23] No one thought IBM and AOL were going to get disrupted back in the tech bubble. They were so far ahead. It was impossible to disrupt them. What was the, Netscape was the leading browser? It was theirs to lose, right?

[00:06:41] Our Alta Vista was the leading, or Alta Vista that was a web crawler too that were back in the day. That's how I was brought up to the internet. Yeah and people would say things which seem so crazy now but people would say

[00:06:57] things like people will never stream videos at home. People always go to the movie theater and go to Blockbuster and go get their videos. People never stream video games on the internet. Next thing you know you have this Twitch asset that Amazon buys for billions of dollars.

[00:07:18] People never do this, people never do that. It's just usually wrong. It's just usually wrong and a real thesis I guess to backtrack is ironically the only thing that I can confidently speak in absolutes about is that things will change.

[00:07:42] If I know that to be true then if change is constant then that sets up my framework for how I can actually think about this. My thesis can be I think it's incredibly difficult to disrupt the two-sided network

[00:07:57] effect and new entrance building on top of the Visa and Mastercard rails instead of challenging them. That's an actual thesis saying it's impossible for anything to come along is silly. You and I both own Bitcoin for instance.

[00:08:15] You much more concentrated but I own a small piece of it almost as chump insurance against Visa and Mastercard which are such massive positions for me. For me to say a placement is impossible something comes along and I lose a lot of money.

[00:08:32] What happens in 30 years if I'm tapping a chip out of my pinky finger with some decentralized currency? I don't know. I don't know, right? That's setting up the framework about the future is unknowable. Is around about rant and reminder to myself speaking probabilities and actual investment

[00:08:52] thesis instead of absolutes when discussing the projections or the future prospects of a company because I know one thing to be true which is things will change. If I know that then that sets me up for my thesis and my foundation moving forward.

[00:09:10] Yeah, and that's typically how I'll think just because I think for me it really came about when I played a lot of poker, I studied the game and you really have to train yourself to think in probability especially if you're playing typically there's two

[00:09:26] types of poker games where you have tournaments where it's a bit of different style of play and then you have cash games and when you play cash games where you can add more and more money whenever you want to the game tournament typically you don't although depends

[00:09:40] on the tournament. You have to make the best move in terms of probability even if the outcome is not what you wanted. If you made the best move for example if you went all in with 55% chance and

[00:09:54] you lost because clearly you'll lose close to half of the time it's fine from it's a correct move in a lot of circumstances just because over a long period of time that specific move if you repeated 100,000 times you'll end up making money and that's how

[00:10:13] I kind of view things investing as well. It's something that I found translates quite well. Yeah, that with weighing like avoid risk of ruin right? And so I find it people have a lot of recency bias right in terms of what's working in the market.

[00:10:31] What you don't say? Yeah, no kidding right now especially and this actually leads into something on my watch list. People have a lot of recency bias in terms of what's working what the dominant player

[00:10:44] is and then you zoom out and you look over the last 20 years how many people said Blackberry is destined to be the forever smartphone in the late 2000s there. That was the clear market leader they owned the business category they owned the

[00:11:06] like business professional typing emails on their phone category in this new world of smartphones and that didn't work out so you know I think it's stuff changes and in tech it changes even faster.

[00:11:21] I'm looking for things that like have been lindy which is things that maybe have not changed for 30 40 50 years and that typically has you know higher correlation for not changing the future. It's like Morgan Housel's book. It's like a guide to things that don't change right?

[00:11:39] Yeah, you know the chances of things changing with railroads is not particularly high. Maybe index businesses credit rating agencies fight go scores these kinds of like really ingrained things those things probably change a little bit less and they have like that

[00:12:00] lindy effect which is the lindy effect is basically the concept of if something's been around for 100 years it has a much higher probability of being around for the next 100 then if something's only been around for five years then it being around for the next 500.

[00:12:15] Very simple concept and makes kind of common sense. Yeah, I mean even one in tech right Intel's another one that you know people may younger people may not see that as much but I remember growing up I mean Intel in the late 1990s

[00:12:31] 2000s I'd say probably a better part of the 2010s as well was the main you know name in terms of CPU processors obviously AMD came about I think in the early 2000 or late 1990s but they were always kind of laggards that you know it was more of a

[00:12:48] value play versus Intel you know if you wanted to have more performance it was always Intel and they even had some cheaper alternative to compete with AMD but AMD's top processors could never compete and then over time that change

[00:13:03] obviously a big blow to Intel was when Apple started making its own processors so the M chips and processors but it just goes to show they kind of did not innovate as much as they should have.

[00:13:17] You can also question the business model that they had in terms of being you know their own you know chip designers but also producing their own chips whether that was more of a 1990s 2000

[00:13:28] type of model and now you know having more of the chip designer and then you outsource the actual manufacturing of the chips is a better model but it's just a clear example like most

[00:13:40] people would not have thought Intel could be the throne from being the top dog in terms of CPU in terms of processors. Yeah I mean look at you know the very famous Moore's Law which is basically states the

[00:13:55] number of transistors on a microchip double every two years that was made by Gordon Moore who was the founder of Intel he came up with Moore's Law in 1965 you know he was born in 1929 he's like the godfather of semiconductors for the most part and this company dominated

[00:14:20] the space every personal computing they ran every Apple device and then you know things changed all of a sudden Apple became a chip designer and you know the the the foundry became completely offloaded to TSMC and the the whole industry completely changed and so we know those things

[00:14:42] to be true that things will change and so that's that's how i'm setting myself up here All right next segment here you have about buybacks here. Yeah buyback blackout periods but also the impact of buybacks on actually share price I don't

[00:14:58] think we really like we've talked about buybacks before right obviously but um we never looked at it from that angle and I thought it was something interesting to do so first of all the blackout buyback period for publicly listed companies is a specific time frame during which the

[00:15:16] companies are restricted from repurchasing their own shares also applies to employee in a lot of cases and this period is typically instituted around the release of significant financial information for example earnings reports maybe investor presentations

[00:15:32] or annual presentation where there'd be new information revealed it just to prevent any perception of insider trading or market manipulation the timing will vary but for most companies in the US it's approximately two weeks before the earnings release and then 48 hours after again

[00:15:50] if there's other material release it could also apply to that in Canada what I found from my research is that there are blackout periods around material events like earnings like I mentioned but in general these guidelines are said by the Ontario securities commission and

[00:16:06] the TSX regarding the actual companies and then the companies will have their own policies based on that and from my understanding and I could be wrong here companies said their own blackout

[00:16:17] policies based on the guidelines said by the TSX and OSC I will just assume that the venture probably has a lot less stringent guidelines around that but that's just typical with the venture and typically

[00:16:31] they would also fraud is welcomed with open arms as long as you pay the fees right but again like I said it would also apply typically to employees as well to prevent them from trading

[00:16:44] on you know any important information so it's just something to keep in mind because that will definitely on a short-term basis may impact the share price a little more but the more intriguing

[00:16:57] angle for me is the impact that has on share demand and it's very hard to get that data I tried to look I couldn't find anything concrete with sources but I did find kind of

[00:17:12] general information so first of all you know there was close to 800 billion of share buybacks done in 2023 Goldman Sachs and that's for the US and Goldman Sachs recently said that it could rise to 1

[00:17:26] trillion by 2025 I think we're right around there on pace so far for this year and if you think about it for a second that's around 2% of the market cap for all US stocks so if you

[00:17:39] compare share buybacks versus the market cap but that's just compared to market cap now if we get into what percentage of the actual demand for US equities for a given year is related to stock

[00:17:51] buybacks then that is for sure higher than 2% I think we can just you know I think everyone can agree that it'll be higher than that because clearly you know market cap doesn't mean that

[00:18:04] you know there's a equivalent amount of buyers so the numbers I've seen thrown out there is it could be as high as 40 to 50% but again it's hard to verify the data obviously that will vary from

[00:18:16] company to company for companies that are more aggressively buying back shares that may be on the higher end and vice versa for companies that are buying you know very little shares

[00:18:28] the reason why I'm asking all that is just because it is worth thinking about you know is it boosting the demand for these companies and what happens if the companies scale back the share buybacks right

[00:18:42] that they're doing how negatively could it impact those share buybacks and clearly if they're reducing share buybacks it's probably because the company's results are kind of making them reduce those share buybacks as well so it could be that there's there's more than just that but

[00:19:00] I was just thinking about that I was reading an article maybe a week and a half ago and you know what I tend to do is if I find something interesting I text myself just so I don't forget

[00:19:13] for a podcast topic but I just started thinking and it's really hard to find and if someone knows a piece on it that would do a recent piece that kind of looks at this I'd be feel free to share

[00:19:25] it with me it's something I'd be interested in but I just wanted your thoughts on that in terms of you know share buybacks and how potentially it could impact demand you know upwards or downwards

[00:19:36] depending if buybacks increase or decrease while you were talking I ran a screen okay so this this screen I just put together it was global companies that are over a billion in market cap

[00:19:47] who have reduced their share count on a compound annual growth rate of at least 5% over the last 10 years okay that only returns 48 companies so this is a fairly select list of companies here those names include Lowe's of course the the the Home Depot competitor McKesson O'Reilly automotive

[00:20:13] auto zone AIG HP eBay that these kinds of companies right they've just perennially traded at lower multiples they think they can you know compound the stock the performance of that in basket has been pretty solid on a 10-year cagger like Lowe's been almost 20% McKesson's beat the index over

[00:20:38] that time auto zone has as well there's only five companies on this list of 48 that have had negative share prices during that entire time and these are mostly dying businesses like Herbalife Z Rocks

[00:20:56] CI financial coals yeah that's the whole list actually it's just a just a few names yeah the rest have been you know for the most part market beating ideas I don't know if that answers

[00:21:09] your question but because I was running this screen while you were you were running it but I mean it it does you know obviously they you know clearly it helps performance I think you can

[00:21:21] make the case where it's a good or bad thing right especially you know some of these companies you can also make the case would they be better off buying a little bit less shares and make

[00:21:31] sure they're prepared for a rainy day clearly that's been one of the biggest criticism of some of the companies that were hardest hit during the pandemic like airlines cruise lines where you know they

[00:21:43] would have done like a lot of share buybacks in the years beforehand but we're ill prepared for any kind of adverse event to come up even though you know you can make decays it was a black

[00:21:54] one whatever but you know there's going to be another event probably in the next 5 10 15 years where you know it's going to have a significant impact on different type of businesses

[00:22:04] and you can make the case that is that the best allocation of capital or could be reduced a bit and clearly it can push you know it it could be you know just helping demand for the stock

[00:22:15] and if they do reduce those buybacks that would be a just a really interesting case study for companies who reduce the amount of buybacks significantly over time the change in

[00:22:26] performance that they can have I don't know it's just it would be quite the study to do and I don't think we neither of us have the resources to be able to gather the data the time and all that for

[00:22:37] the research but it is just I thought it was an interesting thought process it's a fairly nuanced conversation like if I back out that number even from 5% reduction in shares on average of the last 10 years to just 4% so just 1% difference that list goes to 106 companies so double the

[00:22:56] number of names come in there just by changing that 1% now you have names in like Apple Oracle Qualcomm, Wells Fargo, Booking City Groups a lot of the banks a lot of stuff that's done you

[00:23:09] know exceptionally well Corning as well Domino's Best Buy, MGM, Ally Financial so I guess what I'm saying is typically if you have that kind of long duration of consistent buybacks you're talking about really mature highly profitable cash flowing machines that have multiple ways to deploy the cash

[00:23:34] and often with these really large companies their hands forced a little bit like what is Apple going to do with the 100 billion that they create every year if they don't buy back a bunch of

[00:23:45] stock right like what what are they how are they going to deploy it and so with a lot of these names it's not just like I'm only going to do buybacks that's like our main capital allocation strategy

[00:23:58] we're only going to do M&A so like some companies don't issue any stock because they just focus on M&A or internal growth or some of course you know the share account goes up over time as we

[00:24:08] talked about last week but many of these companies like they're just producing these enterprise that are producing billions in cash flow that they can't really allocate every quarter no yeah and it's uh no I agree with that and it's just yeah it's still you know it fascinates me

[00:24:26] just to understand the demand side of it what percentage would be tied to share buybacks let's say for any company that has seen their share count drop by even at a 2% compounded

[00:24:41] annual kind of reduction rate or whatever you want to call it in terms of reduction it just be interesting to see like how much of the actual demand is attributed to the company buying back

[00:24:52] its own shares yeah since september of 2020 apples produced like 500 billion in cash or sorry 500 billion in operating income it's pretty good yeah did 118 on the trailing 12 months 114, 119, 108 and 66 that's not bad it's not bad we'll have to figure out the next big product

[00:25:16] because that top line can go down forever yeah no agreed that's the biggest question with apple yeah buybacks is such a nuanced topic it's it's a hotly debated topic it's one and it's debated politically a little bit sometimes too around how should corporations reinvest profits

[00:25:36] like do buybacks benefit society like are they only looking at benefiting shareholders like there there are some political conversations around it's been a hotly debated topic for you know much longer than i've been alive yeah oh yeah definitely but no I mean hopefully people

[00:25:54] think about this as well I think we've talked enough about buybacks you want to get the much anticipated stocks on a watch let's present world world renowned world renowned world renowned

[00:26:07] yeah okay so i wanted to do something a little bit different here for the pod on my watch list which was i'm noticing a trend of a segment of the market of growth names that are going higher

[00:26:21] and higher and higher and higher typically have some sort of AI flavor or some semiconductor connection those are though those have been rotated into at extreme amounts and when you have a rotation into those types of growth names the money's typically coming from somewhere and typically

[00:26:44] they're rotated in from other growth names because these are typically growth capital allocation from large institutions endowments pensions fund managers advisors what have you retail typically rotating in as we know there's not a huge savings rate in north america these days

[00:27:06] typically they're being rotated in from other growth stocks and I wanted to run a screen on stuff that's been growing at a healthy clip over the last three years of at least 15 growth on average

[00:27:20] over the last three years so growthy names a little over three billion in market caps we'll cut it off there have actual operating income so operating margin above zero so that ruled out like half

[00:27:33] the names and are on a 20% drawdown in the last three months so the stock is down is down 20% but the business is growing and it gave me a pretty interesting list of I like a couple of them

[00:27:50] a couple of these are on you know the types of drawdowns that you look back and go hmm those were probably an opportunity the list looks like this workday which is the software company

[00:28:03] all to beauty the makeup company malina health care Celsius holdings we talked about Celsius the energy drink company it is on a drawdown the growth has been nothing short of exceptional of course the stock's been rewarded but it is down more than 20% saya ink Lincoln electric

[00:28:21] kinsdale capital which I know a lot of people really like kinsdale capital solid compounder wise which is my favorite in terms of highest on my watch list in this list wise is a UK listed fintech paycom day force open text the Canadian company pay lossy wex five below

[00:28:45] zoom info clean spark and double verify if I include the ones that have negative operating margins you get a lot more fintech name growthy fintech names as well and so that seems to be a beaten up name

[00:29:01] is like high growth fintech people are rotating into high growth AI yeah I mean it's that's an interesting thought as well I think there's probably some people that are you know for the money

[00:29:13] I think index funds are probably taking a large chunk of the capital and because of it because it's a market cap weighted and people can dive into those there's tons and tons of articles out there

[00:29:26] are very good articles that you know kind of explain the risk of index funds because you know the constant inflows that you see in these index fund whether it's you know pension funds

[00:29:38] you know in Canada and the US when you have a DC pension typically you'll have these index funds and you get paid and every two weeks you put money in the the same index and then money flows to the

[00:29:49] top holdings and it's kind of this per perpetual cycle and I think that's probably part of it too is that capital just flows in and goes to the top names and then you get names like you

[00:30:01] just showed that I have less capitals flowing to them but also there's probably a second a rotation that people are doing as well can I tell you a crazy stat go for it on this topic

[00:30:13] that you're talking about there's a lot of momentum built into the market cap weighting names like the s&p is essentially a trend following strategy the magnificent seven have so that's what apple

[00:30:28] Microsoft Amazon Nvidia meta Tesla Tesla was in and out yeah I would say yeah maybe a missing one I'm not sure um those those names I think I missed google yeah I was gonna say yeah the magnificent

[00:30:46] seven have a 16 this is from a few days ago have a 16 trillion combined market cap which is 34% of the s&p 500 and larger than the entire s&p 500 by market cap in February of 2016 can you believe that

[00:31:08] I mean it's pretty staggering I'm not overly surprised just because I've been reading a lot on it but yeah it's pretty that's a mind-bending stat the magnificent seven of 16 trillion in market

[00:31:22] cap this is from Chris Bloom Chris Broomstam's research uh that he posted and I like looked back and it was like yeah if you look at February 2016 it's just inches higher than the entire market

[00:31:33] cap of the s&p 500 in February of 2016 so less than 10 years ago wow money printing will do that boost asset prices yeah and concentration at these top names yeah and I mean there is a question

[00:31:51] to be asked right what if there's and I think the biggest risk with that concentration just a few names and also you know it's pretty much concentrated in one sector whether you want to divide that sector

[00:32:04] between communication services and tech whatever but let's just say it's one big sector is if there's an then let's say recession or you know more severe recession which starts forcing people

[00:32:17] to draw down on those savings that are all in index funds that is where the risk kind of kicks in a little bit where you could have a kind of a reversal to the means in terms of being so heavily

[00:32:29] weighted as now people are selling clearly there's going to be selling more from those top holdings if they're just selling the index agreed all right let's kick it over to your name here

[00:32:42] never heard of this company before me neither before the the research show I wanted to go 20 minutes ago no I worked on it yeah I think two three hours this morning my idea was to try and find a small

[00:32:57] Canadian company that I found pretty interesting it wasn't easy because a lot of them are kind of related to energy services mining obviously but this one piqued my interest so it's computer

[00:33:09] modeling group ticker cng it's listed on the tsx and I'll just preface obviously I just kind of researched this for a couple hours so take it everything like this is more of an overview

[00:33:21] and we're not I'm not doing a deep dive here it's probably a shallow dive now I'll give an overview of what they are so they're a global software consulting company that focuses on advanced reservoir modeling and seismic seismic interpretation and I'll kind of

[00:33:38] save what that is so what this means is their software allows oil and gas company to model where oil and gas deposits are and according to their investor relations side they have the

[00:33:50] vast majority of the market share when it comes to these types of software they have 100% of the super major companies as clients for those not familiar with super majors these would be companies

[00:34:02] like exxon mobile shell BP so those are the like big of big oil company they're the massive ones and they also have 75% of the top 25 our largest oil companies as clients in the world and in

[00:34:16] September of last year they made the acquisition of a company called BHV the reason I mentioned that is because I will be talking a little bit about them when I talk about the results this allows them to license seismic interpretation software and incorporate machine learning or obviously AI

[00:34:34] to help decision making my understanding with seismic interpretation which I probably have trouble saying that word but I'm sure people will understand with my French action as simple as possible if I try to explain it is that it is the process of mapping subsurface areas so this allows

[00:34:53] oil and gas company to better know where deposits are and the best methods to extract them so obviously that's pretty important and from the brief research I did I think it's extremely you know

[00:35:06] it seems to be something that's extremely complex to do so it's no surprise that a company that does this well would gain a lot of traction with major oil producers and the CNG started back in

[00:35:19] 1970 and they went public in 1997 on the TSX so they've been they've been around for quite some time so it's more of a it is a software company but really specific to the oil and gas and that

[00:35:33] seems to have been quite a challenge for all in gas companies is really trying to just map what's happening deep underground and being able to better understand how they can access

[00:35:44] the resources so I can see why they would want to invest in this kind of software because it will definitely pay dividends for them down the line any comments before I get I keep going

[00:35:56] the question I have that I want answered is what the heck happened in like September 2022 timeframe I saw you did that you said they did an acquisition before that yeah but if I look at just

[00:36:12] this is I'm such a visual person so like first thing I do is like graph their total revs here and you know hummed along basically at 13 million a quarter for a long time and then or sorry excuse me September 2021 not 22 I don't remember what I said anyways that's

[00:36:30] that's where there was an actual acceleration in the top line and then it jumped up again on the closing of that acquisition that you just mentioned significantly but I'm just so curious about the catalyst in that timeframe in 2021 when you had this company basically flat for

[00:36:50] the better part of 10 years before that yeah I mean that's I'm not quite sure that's my honest answer here my suspicion would be that it was probably because of the oil bear market so kind of the oil crash that started happening in 2014 where companies kind of scale backed

[00:37:09] investments and I'll touch a little bit on that you know they went from I had some numbers here so 900 billion invested back in 2014 and now it's been kind of trending more around 500 billion so my my assumption would be that company kind of scaled back and probably in 2021 especially

[00:37:30] after we saw you know during COVID basically like companies were like giving away oil you know it was below the cost of producing it right and has demand for oil started to pick back up I would assume that companies probably started investing more into exploration and essentially software

[00:37:50] like they offer do you remember I talked about Pazon systems particular psi on the TSX for one of my stocks and I watched this a while back which does monitoring for drilling rigs their chart their revenue charts even though the numbers are different look identical they both

[00:38:09] provide software for this end market so I think yeah you're looking at something kind of macro here but it that's always surprising to me with a software name so I yeah I'd want to just live

[00:38:21] look at a little bit more into that if there's like some usage pain like if there's some usage pricing or if it's easy to kind of turn off and on as rigs come on and off like certain drilling

[00:38:32] operations come off and on like that affects the actual revenue of these software companies that's one thing I'd really want to know yeah so from what I understand the company does like

[00:38:44] in terms of their revenues they'll be more on a license annual license kind of deals so the companies can you know from my understanding they could decide to not use the software but again I think

[00:38:58] it probably is worth their while to keep you know the license active just because it's probably not a huge cost for them and the benefits they can get from it is substantial

[00:39:09] every time I you know what I just realized so the ticker is CMG and I've seen I've seen this ticker before but I thought every time I saw CMG that was Chipotle because Chipotle is CMG on the

[00:39:25] it is yeah on the didn't even realize Chipotle Mexican grill is the same ticker on the NICY so I think that's why I was tripping me up okay so okay CMG on the TSX is computer modeling group

[00:39:40] okay got it so yeah so and just to finish here on you know the numbers what it looks like so very very small company 1 billion market cap in Canadian dollars 109 million in the most recent

[00:39:53] full year which ended on March 31st revenues were a 47 percent over a year however that was due in part to the acquisition of BHV excluding excluding the acquisition revenues were up 19% and like I said most of their revenues are via annual licenses they've had fantastic return on

[00:40:12] invested capital so over the last five years the average is like 30% so they're doing very well in terms of capital invested the operating margins I like to look at that because it gives a good

[00:40:25] idea on at the actual business they have been trending down so they went from 42% in 2020 to 31% last year something to keep an eye on if it's a company that's intriguing you free cash will

[00:40:37] per share free cash will and free cash will per share actually have grown at a compound annual growth rate of 16 and 15% respectively over the last five years so definitely good to see that

[00:40:49] net income has grown at a keager of 3% over the last five years so not as high but nonetheless you know not too bad either dividend they actually pay a dividend of 1.59% and the dividend is

[00:41:04] typically covered at around 50 to 60% of free cash flow so definitely sustainable a bit on the higher end I would say for a software company but the fact that they've been listed for so long

[00:41:16] and have kind of a core business and obviously they're making some investments with the acquisition and seem to be using more and more AI to help their tools I guess you can probably make a case that the

[00:41:28] dividend is not too bad in terms of the payout ratio but clearly probably wanted to be below 50% that would be my opinion the balance sheet is really pristine they currently have 63 million

[00:41:41] in cash and zero debt they do have some liabilities but those can usually be negotiated right like leases and stuff like that so very nice balance sheet the valuation is not cheap but if growth

[00:41:54] can continue it's also not crazy so a forward P of 35 and a forward price of free cash of 29 so overall I would say very intriguing business like I mentioned I touched on earlier we went

[00:42:08] talking in terms of investment in the oil and gas sector in exploration you know it's been down over the last decade is essentially since 2014 and I was looking at a kind of piece here that was

[00:42:23] really interesting from risk that energy and they were pushing back on people saying that the lack of investment could be bullish for oil prices you know in the decades to come because what they're saying and I've heard this before is that yes there's less money being invested 900

[00:42:41] billion 2014 and now around 500 billion however there's an argument to be made that technology has become more and more efficient over time and that the drop in investment is actually being offset by this advance in technology and I could see a company here likes CMG being able to benefit

[00:42:59] from that in the next five to ten years as companies are trying to be more efficient with their investments especially if they're trying to you know probably hedge against volatile oil prices because it's nice and dandy if you're spending lots of money on investments if oil you know

[00:43:17] doubles from here but if oil kind of goes sideways for the next few years or even decade you want to be as efficient as possible to make sure that yes you're still investing

[00:43:27] and finding new deposits but you also want to make sure that you're not overspending at the same time and if oil prices do kind of go sideways you'll still be profitable but if they do go up

[00:43:40] you'll have plenty to draw on and you'll have made the proper investments. The thing that I don't understand about these software companies is you know like I run a software company why is the revenue so cyclical like of course they're serving a tough macro environment with cyclical

[00:44:00] backdrops on the companies who are their customers like why is it so easy to switch off and on and like quarterly revenue does not look like a software company so I just don't really understand

[00:44:13] that. Well it's probably just um I would assume again I'm just assuming because I haven't looked that deep here it's probably I would assume because it's a license an annual license they

[00:44:25] probably just pay like once a year right so it's probably you know I think that would make sense it just depend on when the license renewal comes up so that's probably why there's a little bit of

[00:44:37] kind of this slick cyclical aspect to it. I'm not sure but that would be my guess. It's actually a little more steady than I actually you know I take that back actually

[00:44:48] this uh compared to the previous one I just mentioned yeah this is pretty this is a pretty steady chart actually. And they were also fighting like you know the last decade you

[00:44:59] not only them but the oil and gas industry like we've you know talked a lot about ESG but you know you can make an easy case that the whole push of the ESG and demonizing

[00:45:12] oil and gas in general yeah definitely took a you know had an impact on a company like this at least indirectly. I mean at the end of the day I think the oil and gas production and oil and

[00:45:25] gas industry I think you know they take some criticism that might be fair but I think there's also some unfair criticism especially when you start looking at natural gas and you know you know as well as probably anyone you know listening to this podcast that you know natural

[00:45:42] gas can be a great solution to reduce greenhouse gases when you compare to things like coal right so it's um and that's oftentimes forgotten in the debate they I've noticed they tend to lump in

[00:45:57] everything you know fossil fuel together and not saying that okay like not all things are being created equal. I like the cyclicality of this business and being able to do M&A and potentially

[00:46:15] distressed other software names that serve their end vertical market it looks like they're doing that here with that BHV name I mean I don't know how to stress that I don't know much about the

[00:46:25] company they've acquired but that I actually really like when these types of names operate in cyclical markets to be able to do opportunistic M&A kind of like a trucking roll-up with TFI or

[00:46:41] ODFL or XPO like that's their bread and butter right is buying like you know when when the wave goes out you go acquire all the distressed assets and when times are good you make all the cash

[00:46:53] and then you have that war chest to go do it again for when the downturn comes next because it does come and that can be really kind of opportunistic it's like it's like when as an

[00:47:04] investor I actually want to buy cyclical names when they look expensive on a multiple yeah it's counterintuitive you want to buy cyclical names when they look expensive because the earnings are

[00:47:17] down and you want to buy cyclical names at high PEs it's so hard to wrap your head around but when you're at low PEs you're typically you know in the cycle yeah and it's usually going

[00:47:30] to be companies right that'll be more conservative when things can't think times are good so they'll be a bit more conservative they kind of realize they're in a cyclical industry so they'll make sure

[00:47:42] their balance sheets are short short up like clearly they're gonna use that to their advantage they'll make sure the balance sheet is good they're not making crazy bets you know shareholders might be saying like oh why aren't you buying back more shares paying more dividends but oftentimes

[00:47:58] they'll you know just press on the brake knowing that a downturn will come and then when the downturn comes they can pounce on those companies that weren't being too excessive not conservative enough

[00:48:09] and now are in distress or in trouble and they have to do a fire sale and then they come in swoop and then longer term they're definitely the beneficiary from it. Thanks for listening to the

[00:48:21] podcast folks we appreciate you happy Canada Day and hope everyone enjoyed their time this episode is coming out on Canada Day so maybe maybe you got some fun stuff playing for the rest of the day

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