[00:03:18] Braden Dennis: Stock platform that they’re using and you know, they just see, well, I can get paid X percent, I could potentially even live off this. And while dividend income and income strategies are totally legit for most people, you know, searching for 10 plus percent dividend yields, probably talking about a business in structural decline in looking at permanent capital loss in your portfolio, typically I see.

[00:03:42] Braden Dennis: All the time and questions that come to our podcast like, Hey, can you review this 15% yielder, like, you know, couple tens of million in a market cap company? And I’m just like, Ugh, man. No, like one no, we’re not going to look at it. And two you’re looking at potentially huge yield traps. So value traps and income yield traps constantly.

[00:04:05] Braden Dennis: I see. And most DIY investors, including me, made these two exact mistakes. I see it all the time. 

[00:04:12] Rebecca Hotsko: Yeah, on the dividend yield, I remember making that one too. And I don’t like when filters have a dividend yield because it is so misleading. It can be just because the share price plummeted. And for example, I know a lot of emerging markets, I think the Brazilian et TF actually has like a double digit, dividend yield.

[00:04:32] Rebecca Hotsko: And it doesn’t mean it’s a bad investment, but it also doesn’t mean it’s a good one. And if the history of the dividend yield you have, Back on that and see if it’s actually sustainable, can they pay it out based on their dividend payout ratio? And so there’s some things that investors need to do besides just looking at that number at face value.

[00:04:50] Braden Dennis: Yeah, I think that’s totally right. Now you’re talking about payout ratios and, you know, the history and all of that. Data’s not hard to find. It’s easy to find these days. It’s just the fact that it’s so alluring to think of it as a new, you know, income stream. Everyone wants to wake up and, you know, while they were sleeping they were just printing money.

[00:05:11] Braden Dennis: Often it’s not as simple as that. Not only in business and in entrepreneurship, but also with your investing portfolio. Income is rarely that passive and so I think that there are a lot of merits to wonderful dividend paying stocks. I own many of them. Some of them are some of the highest quality businesses in the world.

[00:05:31] Braden Dennis: Think of Visa and MasterCard, who consistently hike their dividend at aggressive paces. You know, think of Apple. These are dividend paying stocks and some of the biggest blue chips in the world that also have growth prospects for them. But that’s the important part, is that they’re really solid businesses with strong fundamentals and pretty great prospects for the future.

[00:05:52] Braden Dennis: From when we’re recording here today, not to be mistaken with just some, I’ll get paid on a dividend yield. So I would say that’s a very common mistake. Kind of circling back to your first question. 

[00:06:03] Rebecca Hotsko: So then what does your investment framework or your process for finding stocks look like? Because everyone has their own methods to find them, but how do you get stocks on your radar?

[00:06:16] Braden Dennis: Yeah, I mean there are so many ways you can do it. Some people are very quantitative and are looking at stock screeners, which I think is helpful for people to start getting a list of investable ideas. But that must be the start. Of a process and not the finish of a process where you have to actually look into the business characteristics.

[00:06:36] Braden Dennis: Do they have a recognizable moat? Do they have, you know, a profitable business that they can endure for a really long time? Can it grow for a long time? And so these are the six types of questions that I ask myself once I’ve maybe found a good idea, whether it’s, you know, online or through a stock screener or just on my own.

[00:06:57] Braden Dennis: Like just paying attention to the things you see. You know, things that you can contextualize and experience all the time. You know, it’s the old Peter Lynch thing. You go to the mall and you do channel checks on which businesses are killing it. You could have gone to the mall and noticed that Lululemon has been crushing it for well over a decade now, and investors have made boatloads of money being a shareholder.

[00:07:20] Braden Dennis: So idea generation is an art. There’s no one right way or wrong way to. But if I do have an idea that I’m very interested in, you have to be very selective because if you don’t have an extremely high barrier for greatness, you’ll end up with 40, 50 ME stocks in your portfolio. You won’t know what’s going on with them.

[00:07:44] Braden Dennis: You won’t know which metrics to track, and you won’t know what makes them great . And so if you are giving yourself an extremely high barrier for greatness, then either you’re going to have probably great businesses in your portfolio, or the overall, you know, sum of your portfolio is going to get better over time.

[00:08:04] Braden Dennis: There’s just no, there’s no one telling you have to own anything. less than greatness. And that’s what makes being, you know, a DIY investor. So great. So those six things are just growing top line consistently and profits on free cash flow. I mean, there are tons of waste to buy a stock that’s maybe reducing the share count quite aggressively, returning cash back to shareholders via a dividend.

[00:08:29] Braden Dennis: You know, there’s lots of ways for investors to get complic. But I have rarely seen investors do extremely well on businesses that have a shrinking business and structural decline unless they’re looking to be in and out of it trading, which I’m not looking to do. Number two, a recognizable moat that’s durable.

[00:08:48] Braden Dennis: Now there are many books you can read on this. There are so many ways to think about durability in a business, whether it has high switching costs. It’s just such a pain to switch off , a good example is a cloud provider. One of the people I really like. I was listening to a podcast and they were describing switching from your cloud provider, like trying to change the airplane engine mid-flight, and I wholeheartedly agree with running it as running a software company today.

[00:09:17] Braden Dennis: These are really high switching costs, so that’s very recognizable. I do like businesses that are underpinned by secular growth trends. An obvious one here, like think like cybersecurity, Microsoft. CrowdStrike, the two leaders there now should probably go to number one in my list, which is a business that has pricing power.

[00:09:37] Braden Dennis: You know, if you come listen to my podcast, you’ll have, you know, just one penny for every time I talk about pricing power, and you’ll be very well off. And the reason for that is I want to own businesses that get to set their price, not price take. So this is price makers versus price takers, A price taker.

[00:09:56] Braden Dennis: Is an example of a commodity business. You know, if you sell a commodity, sell oil and gas, your prices are dictated by the market, versus iPhones are decided by the Apple boardroom. The price of, you know, the newest MacBook is decided in a meeting in the afternoon. So that’s an example of a price maker.

[00:10:17] Braden Dennis: And then last two, just , to quickly round this out, they demonstrate consistently high returns on invested capital and that the management is aligned with long-term performance and execution. I think that those go a long way, require a little bit more nuance in your research, but the long-term winners are run by winners, typically, historically.So those are the six things I’m always looking for. 

[00:10:40] Rebecca Hotsko: I think that was a really good encompassing checklist that we can use when we are looking at businesses, if they meet all of those. And one that you talked about was a moat, and a lot of investors are familiar with this concept who have studied Warren Buffett looking for that sustainable competitive advantage.

[00:10:58] Rebecca Hotsko: But that is easier said than done. And so I’m wondering if you can speak about what are some of the most important factors you look for to identify that a company has a moat and not a fake moat? 

[00:11:10] Braden Dennis: No, I think that it’s a great question because anecdotally you can be tricked into thinking it has some wonderful moat.

[00:11:17] Braden Dennis: Maybe because of your bias. Maybe it’s, you know the company you are familiar with and you’re not as familiar with the competitive landscape that it’s out there. And so I think that’s a great question. Historically, you haven’t had to be first to many of the mega winners, you know, how long could you have recognized Apple was onto something great?

[00:11:39] Braden Dennis: Netflix was onto something great, Amazon was onto something great, you know, dollar for dollar, you know, in terms of the total investment. That Warren Buffet threw down an apple was, well, well, after, I’m going to boldly say you and I both had iPhones in our pockets. Well, after that, Berkshire Hathaway initiated a gigantic position in Apple, and it may go down as.

[00:12:04] Braden Dennis: The best investment of all time may be in his portfolio, just based on how much capital they’ve thrown down. It is now with over 40% of the Berkshire Hathaway public portfolio, and so you haven’t had to notice the moat right away. Sure. If you want like a hundred bags in your portfolio and you’re looking for micro microcaps, sure, maybe, but you haven’t had to.

[00:12:26] Braden Dennis: And so that competitive advantage, that durable moat sometimes has been obvious for decades. I was talking about Visa and MasterCard for a while. Those are not new businesses. They have extreme competitive network effects. If I want to start up a card network, it’s not going to work. Why? Because the merchant doesn’t accept it and no one has it in their wallet.

[00:12:49] Braden Dennis: And so you just have this coldstar problem with network effects. Again, these are businesses that are, you could have made extremely amazing compounded annual returns and been very, like, quite late to the party. So I think recognizing the moat does not have to be some sort of early stage. Usually it is what is called, what I like to call, obviously.

[00:13:10] Braden Dennis: Great. It’s just obviously amazing. I can explain it to my, you know, two year old niece about why it’s amazing and in very simple words. I think that simplicity is often. The easiest way to describe great moats. . 

[00:13:23] Rebecca Hotsko: The one thing that I struggle with when it’s a very well known company like Apple or something, is when it gets so popular and the price runs up just by popularity, then you can lose if you overpay for that growth and your returns will suffer even if you are right about the investment.

[00:13:43] Rebecca Hotsko: If you’re paying too high, then it doesn’t matter. And then I guess the other thing you also mentioned is that the return on invested capital is super important. Well, I guess so. Thing is, if you’re wrong about the growth and it reverts to the mean, then you suffer too. So it’s a tricky game. Do you have any tips on how to find if a company has this sustainable growth rate?

[00:14:05] Braden Dennis: Again, great question, and it ties back to if they remain to have their competitive advantage. There’s a book that I just finished called Seven Powers, and it talks about the seven competitive advantages that businesses can use. And of course there may be more than seven, but these seven speak to how a company can retain its high return on invested capital and it’s long-term growth trajectory because it is able to push off competitors. 

[00:14:31] Braden Dennis: Every good moat should have a long list of dead bodies of the companies that tried to compete with it, you know? And so that doesn’t mean that it’s going to stay there forever. Let’s look at the largest 20 companies by market cap in 1989. Not one of them is in the top 20 by market cap today in 2022. Not even one of them .

[00:14:55] Braden Dennis: And those were the 20 most powerful, widest mo, fastest growing behemoth companies that had gravitational pulls in 1989. Not one of them is on the top 20 by market cap today. And so it doesn’t mean that many of them have disappeared, it just means that. You know it’s a new era and many of the companies today are defined by big technology and those kinds of things.

[00:15:19] Braden Dennis: So let’s look at an example like Google, A company I hold today, I think is one of the best businesses of all time. If you have been paying attention to what’s happening in ai, you can get actually better results from using ai, completely open source for free. Then the search engine results pages of Google today, and so this is something.

[00:15:40] Braden Dennis: I refuse to get caught in my own bias of saying it’s the best business of all time and then watching, you know, completely disruptive technology destroy how they make money on the search engine results page. And so that’s something that I have to be aware of as an investor and continually monitor the thesis and continue to track just one, two metrics that are important.

[00:16:00] Braden Dennis: For instance, let’s use Spotify, a company again, where many of us know the two most important metrics. In my opinion, how many premium subscribers are adding each month? That’s one metric. And two, it’s gross margins. Because of their margin, it’s very difficult for them to reach real operating leverage with their business model.

[00:16:19] Braden Dennis: I tracked gross margin for eight quarters in a row. It didn’t improve, like my investment thesis I thought was going to have, I love the company. I had to throw out my bias and exit the position. I gave myself two full years, eight full quarters of them saying the gross margins are going to prove next quarter’s promise.

[00:16:36] Braden Dennis: And so if that’s just not happening, I use the app like eight hours a day. I’m obsessed with it. I love it. But I had to throw those biases aside because I was just tracking 1, 2, and 3 metrics that I. Are the most important for the business or else it’s really easy to get lost in the weeds and really track their competitive advantage over.

[00:16:55] Rebecca Hotsko: That’s great that you mentioned that because I think some people can be biased if they really love it. They almost want to make the investment work no matter what. Even if you use the product all the time. But if your valuation doesn’t match up with the price, then it’s time to sell. And so I am wondering now that we heard your checklist on what you look for to find these high quality businesses, do you have a specific company or investment that you want to talk about that meets all your criteria so we can see this framework in action?

[00:17:27] Braden Dennis: Sure thing. I think that’s a useful exercise. Just for the sake of the show and you know, me being here in Canada, it’s always good to highlight one of my largest single equity positions. Constellation Software is ticker CSU on the Toronto Stock Exchange, with about 40 ish, 45 billion in market cap in Canadian dollars.

[00:17:46] Braden Dennis: So that’s like, a couple of bucks in USD, right? Like just that’s like $3 and 20 cents. In U S D consolation software is a roll-up of niche vertical market software companies headed up by Mark Leonard, who may be the most unknown billionaire in the world. You know, in today’s age, if you’re a billionaire and you search their name on Google, you could probably find extensive information about them, interviews or at least a couple of photos.

[00:18:16] Braden Dennis: There are two photos, there were three, and it seems to have disappeared from the internet. Two photos active on Google of Mark Leonard. He has been completely away from the limelight and busy building one of the most impressive public companies indefinitely in Canadian markets, but in the world as well.

[00:18:37] Braden Dennis: So today, if you, if you get an idea of the context of returns that Mark Leonard has gotten, we’re talking about more than 30%. Compound annual growth rate for 20 ish years, which is astounding and really hard to wrap your head around because they have acquired 122 niche vertical market software businesses in the last trailing 12 months, which is like unbelievable pace.

[00:19:03] Braden Dennis: That’s deploying the equivalent of 1.7 billion in capital in their last 12 months. To give you context of how they have scaled this, They only deployed 173 million of capital just in 2016. So the Bear case on consolation has always been, you’re buying these tiny mission critical niche vertical market software companies in rural America, Europe, Asia, Canada, like very random, obscure businesses.

[00:19:32] Braden Dennis: How are they going to keep doing this and do it at an accelerated pace to justify the market? And they have not only done it by a growing amount every year, but at an accelerated pace every year. And so this goes back to my thought about winners winning. Not only winning businesses keep winning, but winning operators and winning founders and winning entrepreneurs keep winning.

[00:19:56] Braden Dennis: And Mark Leonard is, especially that, you know I adore him and I know almost nothing about him. Hearing him on a few calls with the shareholders. Other than that, he’s six five and looks like Gandalf the gray. Literally, like he has the beard down to here. And so just these real outsiders these people that are just cut from a different cloth.

[00:20:17] Braden Dennis: Tend to run extremely good public companies and often many of them are still run by their founder like Mark Leonard. So I think that he’s worth worth calling out and seeing what they can do over the next 10 plus years. Continuing to roll up a category that I’m very bullish on, which is small mission critical vertical market software businesses.

[00:20:39] Braden Dennis: To give you an example, Say, I have payroll software that is specifically for running a gymnastics club like it does, just the features that you, Rebecca, as a gymnastics club owner would like, that’s for me. I need it. It’s better than, you know, using a big thing like QuickBooks or ADP or something like that.

[00:21:00] Braden Dennis: That’s the type of business we’re talking about. Some of them they’re buying have, do like only a couple hundred grand in revenue. So we’re talking about small companies buying them usually directly from the founders or from the family. And there are over 40,000 of them in their database that they’re ready to roll up.

[00:21:18] Braden Dennis: So they haven’t even scratched the surface. There is increased competition because many people have realized Mark Leonard can’t be the only one, you know, buying these things. These are too juicy and usually really good multiples as well. They do have increased competition, but they’ve built out this wonderful, decentralized model to be able to buy that many companies. We’re talking about over 100 per year. 

[00:21:41] Rebecca Hotsko: I am wondering, does it lack anywhere on your checklist? Is there anything that you’re kind of unsure about? You kind of mentioned the competition could be rising up, I guess. What would make you change your views on the company? 

[00:21:55] Braden Dennis: For sure. I mean, you know what, it’s kind of ironic is the businesses that they typically buy do not have many of the characteristics I’m talking about.

[00:22:04] Braden Dennis: I’m talking about not great products because they’re buying them at such low multiples. They usually have really high switching costs, which is good. But we’re not talking about the best-in-class products. They actually usually have like zero or even negative organic growth on the whole ecosystem of Constellation software as businesses they own.

[00:22:25] Braden Dennis: You know, I, the last five plus years, just they’re doing like 5% organic growth. So we’re not talking about great businesses. They’re not buying wonderful businesses. They’re buying steady cash flows of niche critical mission critical businesses that just can’t keep humming along. What their key differentiator and their competitive advantage is that they have built out a group of six operating groups that perform this m and a in every corner of the earth.

[00:22:53] Braden Dennis: And we’re talking about, for instance, topics, which is actually a s, they spun part of it off, but we don’t need to get into that. They’re a Dutch company that rolls up various languages of this softwares. So say I have that exact same payroll software, but I’m a German business and none of my competitors, the big Intuits of the world are not building this product for Germany or for the Netherlands or for Belgium.

[00:23:17] Braden Dennis: There’s just no real competition in that ocean. So they’re able to scale in a way that is very hard to re. And so that the mothership has competitive advantages, but the businesses they have don’t. So this is actually a very weird one to put through my checklist. Luckily, you know, I don’t sell winners, and now you can see why it’s such a large position in my portfolio. If you take a look at how Constellation software stock has performed.

[00:23:47] Rebecca Hotsko: I’m also just thinking of the intrinsic value assessment of this. Do you have to do anything differently to value this company than other maybe more traditional business models? 

[00:23:58] Braden Dennis: I wouldn’t say so. I mean, over time what drives returns for stocks and the best metric in my opinion is free cash flow per share.

[00:24:08] Braden Dennis: At the end of the day, you get all this noise and free cash flow is not a steady metric like ebit. Or even e p s. But over time, free cash flow per share is what ultimately drives shareholder returns in the long run. And so it’s very obvious to see that this business is consistently producing more free cash flow year after year and at an accelerated pace.

[00:24:34] Braden Dennis: And as for per share, They went public with 21 million shares, and there are 21 million left Today. There’s been no dilutions or buybacks. They have a very unique corporate structure where the management team has to actually take their bonus and buy shares on the public market. That’s how their bonus is compensated, and that’s how they drive incentive structures without giving out stock-based compensation.

[00:24:57] Braden Dennis: And so over time, I mean, valuing any company. Is more art than science. I have found, which my engineering brain hates by the way, because I’m definitely more math focused than art, than creativity and art focused. But at the end of the day, a company like this, yeah, you’re probably paying a premium. You have been paying a premium to own it for a really long time.

[00:25:20] Braden Dennis: But if you have an insight into why you should own it for 10 plus years, if you pay a 20% premium over its intrinsic value today. And they continue even remotely close, even half of how they’ve compounded free cash flow per share over time, you will do extremely well. And so that’s the way I look at it.

[00:25:40] Braden Dennis: I’m just trying to own businesses and not grossly overpaid, and I think that many investors were grossly overpaying for growth in 2021. Something had to give. I got absolutely wrecked on Shopify from my entry point because I thought, there’s no way I’m buying this thing at 50 times sales. It went to 20 times sales.

[00:26:00] Braden Dennis: And I’m like, okay I’ll nibble on it for this, like this secular winner in this space and you know, the multiples halved again since then. So I broke my cardinal rule of not overpaying, and I wore it. Thank God it was like a 1% position. This is why, you know, I can come up here and say, you know, stick to a rules-based investment strategy to avoid mistakes, but no one is without mistakes.

[00:26:25] Braden Dennis: I, I’ve made a handful of them in just the past couple years. 

[00:26:30] Rebecca Hotsko: I do want to touch on the overpaying thing. Do you have any, because I think that’s hard for some investors to know if they’re overpaying. So, do you have any tips that you like to use? Is. Certain threshold of metrics that you won’t overpay if it hits a certain ratio, or what do you kind of look at in terms of that?

[00:26:50] Braden Dennis: Yeah, it, well, it depends on the growth rate and the quality of the business, but let’s just throw those aside because there’s too much nuance for that, for this conversation. I do think that, you know, if you’re buying something at multiples, we’re talking about over 20 x sales. We’re talking about, well, well above the norm of multiples, and this will happen quite often when there’s a narrative driving these businesses, like I’ll give the narrative that was in 2021.

[00:27:21] Braden Dennis: These software companies are just different. You know, software as a service is the best business model ever invented. Look at the margins. Look at this. Look at. And then you see some of them get absolutely crushed, like 80% off those highs from that narrative being set in. And they still have to live within the laws of business and basic unit economics.

[00:27:44] Braden Dennis: They were not going towards profitability whatsoever. They have been sold the drug to venture capital since inception so that they don’t have to actually find any operation. Any operating profits ever. Number three, the ownership structure is ridiculous because you’re doubling the share every five years through stock-based compensation.

[00:28:01] Braden Dennis: And so those go against how you remember I just said, how do you make money with a stock? You compound free cash flow per share. Are any of those, none of those things I mentioned are going towards that goal. You had a heavy dilution and zero profits. Yeah, you had a lot of top line growth, but it wasn’t affecting the underlying unit economics whatsoever.

[00:28:21] Braden Dennis: And so there has to be some limit to what you’re willing to pay. I mean, what’s the market median PE today? Like, like 22 ish. So if you’re going well, well above that, then it, the business must either be. Incredibly good, which is a legit reason to pay a premium. And by good I mean just like durable demands, respect, demands, power in the marketplace or two, being growing extremely fast.

[00:28:51] Braden Dennis: Like a CrowdStrike, like a cybersecurity business growing like a 75% year over year on the top line sustained for a long time, that needs to trade at a much higher premium than the market. Given the network effects they’re building and the growth that they’re accomplishing. So again, I know I’m giving you a cop out answer here again, but it is in art.

[00:29:12] Braden Dennis: But typically you will know a gut check. Am I overpaying for this thing? Like, is 30 times sales a ridiculous multiple? Like how do I ever make money on that? You’re in Canada as well here. Remember the 2018 market craze of cannabis stocks? Like you were an idiot if you didn’t own cannabis stocks. All my buddies are like, man, you are in our finance podcast and you’re not in on these.

[00:29:37] Braden Dennis: Like, are you outta your mind? Look, I’ve tripled my money this week, and in the short term you’re like, okay, I’m yeah, sure, whatever. Like, you just gotta pretend you look like an idiot for a couple weeks or a couple, sometimes a couple years actually. And Aurora Cannabis. By the way is a zero and probably in bankruptcy filings very shortly traded at 218 times their forward next year’s sales.

[00:30:01] Braden Dennis: How do you make money doing that? That’s a clear overpay. And so multiples can help guide you. When I say multiples, I mean, you know, per price to cash flow, e v to EBITDA, price of sales. There are right ways to use each one, depending on the level of the business and where it’s at in its maturation cycle. But there are obvious ways to nail You’re overpaying. 

[00:30:23] Rebecca Hotsko: Yeah, you said so many great things there because a higher multiple can be justified. If it’s justified by a higher growth rate and stuff like that. It can warrant a higher multiple. That is exactly what that means, but in a lot of cases, it doesn’t.

[00:30:39] Rebecca Hotsko: And so I think when I think about that, two checks come to mind, you can look at the stock relative to its own history, so you can look at various multiples because the price to earnings can. Highly manipulated. Sometimes that one doesn’t make a lot of sense depending on the business cycle. So looking at the most relevant one for that company in that industry.

[00:30:58] Rebecca Hotsko: Sometimes it’s price to sales or price to book, whatever. Use a combination. But then also looking at the multiples relative to its industry, and then kind of comparing where it lies next to its competitors. That should give you at least some relative comparison where it should be trading relative to its peers.

[00:31:19] Braden Dennis: That’s right. And there are a lot of ways to get in trouble using valuation metrics because, you know, you can fall into some value traps that we were discussing before. Maybe the business isn’t great and you’re going the other way of the spectrum. You’re saying, okay, all right. I’m not buying, you know, 50 PE companies.

[00:31:36] Braden Dennis: I’m buying eight PE companies, and you’re buying businesses that are potentially in heavy structural decline over time. The competitive landscape has changed in a major way. The top line’s not growing even, probably shrinking. And so while that might be a pond to find some great deals, it’s also going to be a pond of businesses that are a lot worse in five years than they are today.

[00:32:04] Braden Dennis: And at the end of the day, I mean it’s so easy to complicate investing, right? It’s so easy to complicate it. The investment world has thrived on the fact that it’s complicated. That’s their business, it’s complicated. You know let me collect management fees on that. And this is not a knock on management fees.

[00:32:23] Braden Dennis: People are, you know, doing their job and providing a lot of value for their clients. That’s cool. But at the end of the day, it’s buying businesses, whether you’re a professional or a retail investor, buying businesses that in the future are going to be better, stronger, more profitable, and have a greater gravitational potential.

[00:32:40] Braden Dennis: More competitive, more durable, all of the good things that you’d want. If you have your own business, those are the things that you’d hope are in five years. And if you’re hunting in low multiple spaces, you just won’t check off many of those things. You’ll have businesses that are in internal decline and are probably going to be worse businesses to own in the next 10 years than they are now.

[00:33:00] Braden Dennis: And the shift that Warren Buffet made when he was, it sounds ridiculous because he was like 22 when he made the shift from. 13. Like what the Oracle always making us feel bad was when he shifted to thinking like a business owner and not a business trader is when his entire, you know, world flipped upside down.

[00:33:20] Rebecca Hotsko: I will say that the one thing that I love about the Warren Buffet strategy and I follow is to think like a business owner. Because even when I started my first business, it finally made sense why you should invest that way because. , you think you can simplify it? What matters to a business? How much are they making?

[00:33:39] Rebecca Hotsko: How much revenue are you bringing in? And then from that, how much are you taking home after you pay all your expenses, your taxes? It just makes everything so simple and we overcomplicate a lot in investing and it’s just really not necessary a lot of the time. It’s just something that I think about. But I do want to get your thoughts on Shopify because you mentioned.

[00:33:57] Rebecca Hotsko: I just looked at the PE today and it is still 300. I did have a listener ask about this stock, and so I wanted to get your thoughts on it. 

[00:34:08] Braden Dennis: Yeah, so I think a more useful place to start the conversation on Shopify and its valuation is using the PE ratio for a company like Shopify, which is growing heavily, building out important infrastructure, and spending tons of money to do that.

[00:34:27] Braden Dennis: Building out new lines of business and new options like payments and actual infrastructure so that they can compete with Amazon on delivery times and stuff like that. Those are not cheap things to do. Like, like Amazon, you know, it’s a tech company, but it’s extremely cap intensive. It’s extremely capital-intensive.

[00:34:46] Braden Dennis: They have over 600 million square feet of warehousing to make the magic button. You click online to the package showing up the next day. Very capital I. And so if you’re talking about [00:35:00] pe, you know, high cost to running the business, you’re not going to have a lot of look through earnings. But if you look at the business today on what they’re generating on a gross profit line item today, the growth is explosive.

[00:35:11] Braden Dennis: And it is the category leader. And if you want to start building e-commerce today, I’ll just go on stratosphere.io, which is, you know, the platform that I use that I started to use. These KPIs for, you know, what makes the business tick And over time subscriptions solutions. Revenue in the last 10 years has gone from 19.2 million to 1.4 billion merchants solutions revenue have gone from four and a half million.

[00:35:38] Braden Dennis: To 3.8 billion gross payments volume has gone from zero to almost a hundred billion in gross payments volume. So we’re talking about significant scale, and we’re talking about a business that has now developed important competitive advantages around its ecosystem that it operates, the partnerships that they’ve built, and all of the add-ons and applications that have been built in there, like the equivalent of the app.

[00:36:04] Braden Dennis: For Shopify partners, and so I always love technology businesses that start to have innovation happen on top of it, not inside of the business, but on top of the business. The payment networks are a perfect example of this. You have all these FinTech operators happening on top of the payment rails, and then Autodesk is a great example for those who are familiar with AutoCAD and Revit, which is architecture.

[00:36:30] Braden Dennis: Engineering construction software, there’s all this cool innovation happening on top of the Autodesk ecosystem. And so that becomes a competitive advantage that you’re the API and the infrastructure for all this innovation happening on top of it. And Shopify is an example of a company that’s benefited from that.

[00:36:46] Braden Dennis: Now, it’s not a comp you know, when without any competition. There’s lots of e-commerce builders that are out there today, but there is a bit of a network effect and brand really matters. Brand is a competitive advantage. One that I don’t lean too heavily on, you know, hang my hat on because brands can change over time.

[00:37:04] Braden Dennis: But if you want to start building a store to sell on e-commerce today, you’re going to Shopify. It’s the name that you know, it’s the name you trust. You know that they’re going to have the best infrastructure and build your site the best. And this is a growing field, and it’s very, You’re not going to switch your store infrastructure maybe to save 20 bucks each month.

[00:37:26] Braden Dennis: It just makes no sense to do that. And so they have a lot going for them. Now. If you look at the stock, it’s gotten absolutely decimated from its peak. I mean, what a trade at I’m looking at the USD listing here, 170 all the way down to 30 bucks, 27 bucks, and now trade up at 43. So it’s had quite a nice little bounce off the.

[00:37:47] Braden Dennis: But again, we’re talking about a stock that traded at valuation multiples that had no room for error. And what happens when you have no room for error in evaluation multiple is if they have any little bit of guidance pulled. Any mentions on the conference call of slower growth? Any mentions of maybe Covid did accelerate our pace faster than expected, and now, it’s going to be more, maybe more 2019 levels moving forward.

[00:38:15] Braden Dennis: That is a recipe for a huge stock decline. And so this is where valuation really matters, especially in the short term. Now, we might look 10 years from now and go, wow, it was still even cheap at its peak there. But if that happens, we’re talking about exceptional execution, and that’s what stocks trading at, high valuation multiples like that.

[00:38:39] Braden Dennis: The risk is that if there is any little room for mistakes in the business, execution, management, changing growth, slowing new competitors, there’s just not much room for error in the story for investors to make. And so that’s my opinion on Shopify here today. I think looking forward, the business looks exceptional.

[00:39:00] Braden Dennis: It’s a category winner in an important growing industry. Every KPI I can possibly find looks amazing. The management team is smart. They know what they’re doing. They’ve still run by the founders, which is another thing I love, and they have a lot of optionality moving forward. So there’s more, there’s a longer list of things I like than I don’t.

[00:39:20] Rebecca Hotsko: Have you done an intrinsic value on it, or would you have any views on if it’s undervalued at the current price? Because yeah, I was looking at the price and how much it’s gone down, but do you have any particular thoughts on it? 

[00:39:35] Braden Dennis: Yeah, so one thing I’ll say is proper valuation doesn’t care about how high off of a stock price it is.

[00:39:43] Braden Dennis: The stock could be not. Let’s throw in Shopify for a second. Let’s think. Think of an example of a stock that was trading at a hundred and is now $20 and might be more overvalued than when it was at a. just based on whether things materially changed about the business. Random idea. I don’t know why this is coming to my head.

[00:40:04] Braden Dennis: Build a sling of Coca-Cola. For instance, if Coca-Cola, it was trading at X dollars and it gets cut in half by 80% because the US government says we’re no longer allowed to sell sugary drinks in a can, and this stock goes to 10 bucks, it might be more expensive at 10 bucks based on its future prospects than, you know, a thousand.

[00:40:25] Braden Dennis: And so it’s really important to think about valuation from where we are today and what the business can produce in the future, not off of its high. That being said, it can open your eyes too. A disconnect in the market between something very unloved and its actual business fundamentals. Shopify’s business fundamentals continue to get better and continue to be great.

[00:40:49] Braden Dennis: They never were not great despite the stock moving up and down. Remember how we were talking about how we’d like to complicate things? This is because every single second of the business hours, I can watch Shopify stock go up and down and that may to me incorrectly be a signal of its value, when it may be completely disconnected to the stock’s actual value, and more importantly, the business’s long-term value.

[00:41:12] Braden Dennis: Have I done a DCF on Shopify recently? No. Do I do dcfs often? Almost, hardly ever. Even though I built a tool for people to save levered and unlevered DCFS right in right in our application. What I like to do is I have a journal of expectations I have for the business. So for Shopify for instance, I have expectations for monthly recurring revenue over time for the payments business to increase total subscription solution customers and how their ecosystems are changing.

[00:41:41] Braden Dennis: Those are what four or five metrics I have tracked exactly here. I’m looking at them on my screen, and they all look exceptional and they all look tracking exactly how I expected. Back to the Spotify example, not to be confused. Shopify, I was tracking premium subscribers and gross margin premium subscribers.

[00:41:57] Braden Dennis: AOK, check Mark Gross margin. No. Now, if that changes, then I’m willing to change, in my opinion. And an investor’s superpower is to be able to change their mind. It is the number one most important superpower for every investor. This is a game of managing your emotions more than anything. And. There are a lot of reasons that the narrative becomes driven by the stock price, when in reality it should be driven by the business fundamentals.

[00:42:23] Braden Dennis: And if the business fundamentals are tracking exactly how you suspected they would, then maybe there’s no reason to to look at it. I think most investors do better if they don’t look at their brokerage account maybe ever. 

[00:42:34] Rebecca Hotsko: I definitely agree with you and I’m so happy you mentioned that bias. I can’t remember what that bias is actually called, but when there’s a certain price that either you bought at, you kind of always have that price anchoring.

[00:42:46] Rebecca Hotsko: Yes. Price anchoring. You have it in your head then, and I think the more we’re aware of these biases, the better investors we can be, because then we don’t fall victim to. The last company I want to get your thoughts on before I let you go though, is Brookfield Asset Management, another Canadian company.

[00:43:03] Rebecca Hotsko: This one, we’re doing the whole 

[00:43:04] Braden Dennis: Canadian gambit here today. We are. 

[00:43:06] Rebecca Hotsko: I think Canada has so many interesting equities right now, so I’m really happy we got to talk about a bunch. This is a really interesting company right now because they’re doing a spinoff, and I was hoping you could talk a little bit about it, what your thoughts are on it, and if it might be a good buy for some investors.

[00:43:24] Braden Dennis: Great question. And back to your thing about Canada, I think that there’s an important thing to point out here, right? There are Canadian businesses, Canadian listed, mostly dualistic except for Constellation software, but their business hardly resides in Canada. We’re talking about global superpowers in their category.

[00:43:42] Braden Dennis: Brookfield Asset Management is certainly in that category. You know, running a Canadian investing podcast like I. We get questions all the time on why we don’t like certain Canadian domestic names, and our answer is, it’s an underweight scale. How can it scale outside of the borders? And if it can’t reach 8 billion customers on planet Earth, it might not be a good business.

[00:44:05] Braden Dennis: And that’s why technology has been such a good performer, is that you’re able to tap into that kind of scale. Now, as for Brookfield Asset Management. We’re talking about a global superpower in alternative assets. What does that mean? Alternative assets, we’re talking about real infrastructure, renewable power, utilities, energy, real estate, and all on top of that is this very complicated management structure.

[00:44:31] Braden Dennis: A bit of a black box run by a guy named Bruce Flat out of Canada. And he runs Brookfield Asset Management. They’ve compounded the stock under his tenure for over 20 years by 17% on compounding under a growth rate. If you look at all the spinoffs, and I’m going to touch on that spinoff you just asked me about in a second, give you some context of the scale of the business today.

[00:44:52] Braden Dennis: 762 billion of assets under management. 407 billion of that is actually collecting fees from the asset management business. So, you know, we talked about great businesses like Software Asset Management that have a lot of those same recurring high-margin characteristics as well, and they have 407 billion of IT collecting fees for the business.

[00:45:14] Braden Dennis: Right now. They are very unique. Operating structure because not only are they spinning up funds to collect management fees on it, but they’re also operating those assets. And so they are a gigantic operator of assets like renewable, hydroelectric power stations. They’re one of the largest single owners of renewable hydropower stations.

[00:45:35] Braden Dennis: Think of dams around the world. And that really unique structure of not only running the asset management business but also operating, it gives. Unique scale and unique expertise. Now, in just a few days, Brookfield Asset Management will be doing a spinoff of their asset management business because as I mentioned, we’re talking about renewable power infrastructure projects, real estate, and those subsidiaries.

[00:46:03] Braden Dennis: Are all also publicly traded as pure places? So say you want to know just re renewable power, you can own BEP, which is the renewable power business, which is publicly listed, and think in the US it’s called B E P C, which is the US listing. Now what they’re going to do is spin off the asset management business that has that.

[00:46:21] Braden Dennis: Set 407 billion of fee-bearing capital as its own entity. Now, why would they do that? The reason is if you look out at competitors like Blackstone who are also managing alternatives, they think that those companies are being rewarded higher multiples, and so they think in the short term, They can unlock value by having a pure play on the asset management business.

[00:46:44] Braden Dennis: The total corporation will be called Brookfield Corporation. It’s going to be listed as ticker bn, which does not exist yet, but in a few days it will, and it’s going to own 75% of that asset management business. So we’re talking about roughly owning 75. Of all of the individual operating groups that they have.

[00:47:04] Braden Dennis: And so I, my, the way I’ve always played it is to just own the mothership, which has been Brookfield Asset Management. The mothership will turn into Brookfield Corporation, ticker, bn, and I’ll probably just roll it all into that because one, I like simplicity and I like the prospects of almost every single segment of the business.

[00:47:21] Braden Dennis: And it is run by Bruce Flat, who gets almost no credit. You know, in small investing circles, he’ll be, he’ll get lots of credits. So if you’re in those circles and you’ve been a Bruce Flat fan, you’re like, what do you mean? But globally, Brookfield Asset Management is a behemoth and has, you know, if you ask someone on the street, if they know Brookfield Asset Management is, they’ll probably say no unless they’re in Toronto.

[00:47:43] Rebecca Hotsko: Yeah, I was diving into this company today and it is really interesting because businesses would do a spinoff because they believe the sum of the parts is worth more than the whole. And so I did read an article, but it said the company believes its business is worth it. 82 to $94 per share where it’s trading, think around $45 per share right now.

[00:48:07] Rebecca Hotsko: And so we won’t know if that’s realized until after. But what’s interesting about the split off with the asset management company compared to the corporation will be, it’ll have a higher dividend yield because they plan to pay out 90% of its annual earnings to shareholders. And so I think there’s just a lot of interesting things about this company right now in terms.

[00:48:28] Rebecca Hotsko: Payout, and I mean, we’ll see in the future if it actually unlocks the value it says, but I do think it’s worth checking out. 

[00:48:37] Braden Dennis: It certainly is worth checking out and I mean on a 20-year basis, Brookfield Asset Management on just the stock price, you’re talking about 16% growth rate, and that does include all the spins that it’s done unlocking value over time.

[00:48:50] Braden Dennis: So you’ve got an even better return if you’ve just held all the spinoffs that they’ve done that have come into your brokerage account, including the one that we’re talking about what’s going to happen in a few days. We’re talking about a company that does the right thing consistently. To increase the value of the business, but also maximize shareholder returns through doing, like why would they do all of this, right?

[00:49:13] Braden Dennis: And it’s because in the short term and potentially in the long term, it can unlock a lot of value. You have a very complicated black box of all these different types of real assets and the asset management business all grouped into. The real estate business used to actually trade under its own stock as well.

[00:49:34] Braden Dennis: Commercial, and you know, big malls got so cheap in 2020 that they said, okay, we’re buying the entire thing off the public markets. These assets are world-class. We’re talking about, you know, some of the best office buildings in major city centers like New York, London, and Toronto. And like anchor type malls, like the biggest mall in one of those major cities, we’re not talking about, you know, sub-tier cities, small strip malls.

[00:50:01] Braden Dennis: We’re talking about the best of the best types of real estate. And so they said, okay if the market thinks this, we’re just going to eat the entire thing and steal it off the public market for pennies on the dollar. These are the kinds of things that they have historically done for decades. And there’s just really no reason to doubt their acumen now, especially because of how incentivized the management team is.

[00:50:26] Braden Dennis: The management team owns an unbelievable amount of stock, including Bruce Flat, who’s the CEO and who’s run the business for a long time now. They own a ton of stock. And so that’s always nice seeing those incentives aligned and winners like Bruce Flat keep winning. And so doubting that he can continue to do that seems like a losing proposition.

[00:50:48] Braden Dennis: And Brookfield Asset Management and, and the mothership, which will become BN is a business that I think very highly of. 

[00:50:57] Rebecca Hotsko: That was a really good point you made because for such a massive company to have that much ownership in it, they are really behind it and you have to believe in their vision.

[00:51:07] Rebecca Hotsko: I do have one last question on this. Do you have any views on if a new investor was going to or want exposure to this, would you prefer one over the other once it does the spinoff, or would you suggest maybe holding both? 

[00:51:21] Braden Dennis: You know, it’s funny, it’s a great question and one that I keep thinking about and I don’t have a clear answer yet, and I think that’s totally okay, and the spinoff hasn’t happened.

[00:51:32] Braden Dennis: What I’m going to do is what I usually do 90% of the time, more p more than that with investment decisions. Is due absolutely nothing until I have strong conviction in one way or another. I do want to see a couple of quarters of the asset management business spun out because like I said, it’s been this black box that the market might go, oh my God, as you know, we need to put the right multiples like Blackstone on that Have.

[00:51:58] Braden Dennis: Then and maybe it’s even better business than that. So the answer is I’m doing absolutely nothing for probably two to four quarters. If I have some sort of strong conviction one way or another to own both or to just roll it all into the main corporation that’s a likely outcome as well.

[00:52:14] Braden Dennis: So we’ll see. I think that many investors when they have a decision staring them in the face, should I buy the security. Should I sell the security? Because selling is way harder than buying, it’s a way harder decision. There’s way more emotion and price anchoring being attached to that. So what’s the right thing to do?

[00:52:32] Braden Dennis: Usually nothing. And just think about it. You don’t have to act on this. It doesn’t have to be decided in a quarter of a year or even a decade like we’re talking about great businesses, we’re not talking about penny stocks or you know, something that they need to get some drug approval by the FDA for it to work.

[00:52:48] Braden Dennis: So that allows me to have a longer leash and have the ability to make the right decision and think, because most investing is done by thinking and acting very little. You know if this isn’t the piece of the pie I want to do almost no doing, I want to do a lot of thinking and very little doing.

[00:53:09] Rebecca Hotsko: That was a great way to end the show. Before I let you go, where can the audience go to connect with you and learn more about your work, your podcast, and everything that you put out? 

[00:53:20] Braden Dennis: Sure, thanks. So I do run a podcast called The Canadian Investor. It’s twice a week. We do talk about, you know, these kinds of stuff.

[00:53:28] Braden Dennis: Long-term investing, some Canadian stocks, but lots of global stocks as well. And then I run a software company called stratosphere.io. All the data I’m talking about on this podcast. I’ve been just reading it right off of here like when we’re talking about Shopify’s KPIs, we scrape all that data and put it into one place.

[00:53:44] Braden Dennis: It’s a nice, easy-to-use web application, and it’s completely free @stratosphere.io. 

[00:53:50] Rebecca Hotsko: Thank you so much, Braden. I’ll make sure to link all of those in the show notes. 

[00:53:55] Braden Dennis: Becca, thanks so much. We’ll have to do this again. 

[00:53:57] Rebecca Hotsko: All right. I hope you enjoyed today’s episode. Make sure to follow the show on your favorite podcast app so that you never miss a new episode. And if you’ve been enjoying the podcast, I would really appreciate it if you left a rating or review.

[00:54:16] Rebecca Hotsko: This really helps support us and is the best way to help new people discover the show. And if you haven’t already, make sure to sign up for our free newsletter. We Study Markets which goes out daily and we’ll help you understand what’s going on in the markets in just a few minutes. So with that all said, I will see you again next time. 

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