Yesterday, I did a Zoom video where I showed people the approach I take to valuing individual stocks, including what resources I use and much more information about stock analysis.
You can watch a replay of the video here and I’ve included a full, lightly edited transcript below.
Cody: So, I have no written notes, no nothing. I’m going to show you guys. We’re going to pick three or four stocks, analyze them and then I’ll take questions along the way.
Guest: Cody, how you doing? I saw you play at New Mexico. I was a scout for the Heat.
Cody: Okay, you’re David, yeah we talked. It’s good to see you face to face. You look like you could be a basketball player kind of.
Cody: I don’t play anymore. I sometimes help myself go to sleep by picturing playing like I used to growing up. One of the most influential books I ever read was John McEnroe’s Visual Imagery. I was probably 12 years old or something and I was a good athlete. I was the fastest kid in my town. But, I read that book and he talked about that if you want to be able to do all these amazing plays and things that he does or whatever your sport might be, you need to picture your body doing it. You need to picture you actually dunking the basketball and doing 360 dunks. And to this day I think that’s important. I picture how am I going to make money? How am I going to grow my career? And I picture going to work, trading, investing and making money. And I think it’s always good to picture what it is you want and then take the steps that you can as much as possible to attain it. I would note by the way, I had a 43 inch vertical jump, as David you can attest.
Guest: It’s unbelievable.
Cody: I truly believed, to this day, I truly believed I probably would have jumped high because I was a good athlete. But that extra six or 10 inches that I got from Visual Imagery was the difference in getting me to a division one basketball.
Guest: Yeah that’s a top of the range there. But I went to Wichita State and they said the crowd, the arena unbelievable. Then we went to play New Mexico, this was insane. And I couldn’t believe it. The crowd, the noise. I mean that’s one of the nicest arenas in the nation, still to this day.
Cody: I don’t know. It still is pretty cool. But, it was so unique and you know of course the ’84 Finals were held there. Guys let’s get back to stocks. Appreciate you being here David good to see you.
Cody: All right. All right, let’s hit in. You guys wanted a few minutes on let me pin me to the top here. All right, let me do a welcome. Hey, welcome everybody to the Trading with Cody very special edition, very special Brady episode of live Q&A chat. We do this most every week. A lot of times it’s actually just in a chatroom. Occasionally once a month, maybe once every couple of months. We do a video chat where we engage with each other and I thought, I’m always getting these questions about how do you analyze a stock? How do I find what the growth rates are and what the enterprise value is or whether it’s expensive? And I just thought we’d go through and I would do, I’ll analyze a few stocks with you guys here with me and we’ll see what we can learn. And ask questions along the way. If something is confusing, there are such things as dumb questions. So please don’t ask a really dumb question. But I don’t mind elemental questions. If you are confused on just a fundamental concept of what I’m discussing please do ask, because others probably are too.
Cody: So, maybe there aren’t any dumb questions. Maybe that saying is actually accurate. Actually, here’s and the lyrics of a song my good friend Moses and I wrote together for the band The Muddy Souls many years ago. In it, it talks about don’t ever ask Cody something you can google. So don’t ask me something you can google. But if I can teach you something, ask away.
Cody: Someone wanted me to talk about the markets first and foremost. Look, it was an ugly morning clearly. Semiconductors in particular are down 4%. S&P is down about 2%. If you’re not in a stock that is heavily shorted, it’s probably down today. And if you’re in a stock that’s heavily shorted, it’s probably up somewhere between 30% to 150% today. And we’ve been talking for a while about that I think we’re somewhere in this blow off top phase of a long term bubble blowing bull market that I’ve been writing about and talking about for a decade, 11 years now. And we’re trying to blow off this top somewhere and we don’t know whether the blow off top takes weeks or months, but it’s probably not years.
Cody: I’m clearly not wildly bullish. I think there’s a lot of froth in this market, but that doesn’t mean it’s not going to get even frothier as today evidences, proves in somewhat with those many small-cap and, or large-cap heavily shorted stocks tripling this week or up to 50% or 150% today. I mean you can just run through a litany of them. I bet you could do a list of the most heavily shorted stocks on Wall Street and that list is up 8% today, while the rest of the market’s down two to 4%. That’s not necessarily helping. I think you got to be careful out there. You’ve got to be patient. Don’t be greedy. If you’ve got names like Jumia (JMIA) that we have or Virgin Galactic (SPCE) that we’ve had since ’07. Jumia since ’15. I’m riding those. I’m not selling out of them. I think it’s good to hedge a little bit in it. I think you can maybe sell some long dated calls way out of the money if you’re a hedge fund manager against some of those positions. If not, maybe you just trip a little bit of those. No reason SPCE needed to be at 59 this morning. Now it’s back at 51. Doesn’t need to be at 51 either. These are just numbers at this point.
Cody: One of the things that’s really annoying about the stock market right now is the step I’m about to teach you, is meaningless in this particular moment. Nobody cares about valuations. These are just numbers, just buy more. GameStop at eight, GameStop at 80, GameStop at 800. Just numbers. That’s not true by the way. The numbers matter at some point, just not necessarily right now. So I’m going to teach you stuff and I shouldn’t even use the word teach, because then I sound like I know a bunch of stuff. I’m going to teach you how I analyze stocks. I’m just going to show you what I do to analyze stocks, figure things out.
Cody: But at this particular moment, value investing is certainly dead right now on this date. But, it won’t always be and I’m not necessarily a value investor, right? I mean it’s clear, right? I’ve owned Apple (AAPL), Google (GOOG) (GOOGL), Facebook (FB), Bitcoin, Nvidia (NVDA), all these revolutionary names from a very long time most of them, Jumia and SPCE more recently. But, I try to find them when they are, I feel like, at reasonable valuations in the mindset that I look at. And so with that intro, let’s jump into the market. Let’s jump into analyzing some stocks. Number one, I think the most important thing that I start with is a top down view, okay? I want to look at the world. I want to empathize with other sectors of the world, or other demographics, or just the general population, the seven or eight billion people who live on the planet earth. And try to get a grasp of where the major trends are headed.
Cody: So, I mean probably the best example I can come up with right off the top of my head is when I talked relentlessly about the smartphone revolution and what I called mostly the app revolution. From 2008 to 2011 that was my favorite theme. And the reason why the theme was my favorite was because it is such a revolutionary concept that suddenly people are going to be carrying around little computers that are connected to everybody else and connected to every bit of data and information and video that’s ever been recorded, is all right there in your pocket all the time. You’re going to do billions of people are going to do billions of transactions daily, trillions of transactions. They will be interacting with that platform.
Cody: So, to me people were talking at the time in 2009, 2010 worried is Apple going to sell 20 million smartphones or will it be 22 million smartphones last year. None of it matters, because you knew there were going to be billions sold in 10 years. And then you just had to get your bucket out in front, your investing bucket. You had to get some capital in front of those trends. And in order to do that safely, I want to find the companies that are leading the revolution and then I want to make sure that I’m paying mind to valuation and giving myself an entry point and, or an entry, not a point because I spread my purchases out over time. I don’t do it all at once, as subscribers all will tell you, I do an initial purchase and then I’ll put a little more in a week or two or in a day or two. Hopefully the price comes down as I’m trying to build up a position, because I trust my analysis. I trust my top down view and then I trust my valuation analysis of the stock that I’m going to pick.
Cody: So if the market is moving down, like for example it was with Tesla after I started buying it at what 50, a year and a half ago. And it went down to 40 and we bought it the whole way down and it was very painful at first. As again, subscribers can attest. But I trusted my analysis, I trusted the valuations, I trusted my top down thinking and Tesla (TSLA) knock on wood, has worked out quite well since then, probably because of those things. And something else we should mind, don’t ever confuse a bull market with genius. So, I got lucky too. So we all get lucky buying the right stuff. Well, I do think we can maximize our luck by doing some of this analysis.
Cody: So, right now far and away my favorite revolution out there, the most clear, the market that is most clearly going to be a multi-trillion dollar market five or 10 years from now is space. The space revolution, aerospace. Getting off of this planet and going into the galaxies, going into our solar system. Going to the moon, going to Mars, building stations, colonies on Mars and other places. These things are going to happen, going to start happening over the next five or 10 years and they will turn into multi-trillion dollar markets and I want to have my bucket out in front of them. So I spend a lot of time trying to figure out ways to get in front of the space revolution.
Cody: One of the first one, again as subscribers could tell you, is Virgin Galactic. And so let’s analyze it. I mean this is exactly what I did. Two years ago it was space, it’s happening. It’s finally here. You got SpaceX about to do this stuff. It’s like when Tesla was finally about to release the cheap 35,000 self driving car and that’s why I was like this market is happening. They’re revolutionizing the car. Get in front of it. space, it’s about to happen. The costs have come down. SpaceX is proving that. Who else is out there? We got to find space plays. So then I start googling space plays and at the time Virgin Galactic was still private. It was going to go through a SPAC and the SPAC was trading at $7.00. It was IPOA I believe was the symbol at the time when I bought it and we bought it somewhere around there, right guys?
Cody: And at the time I looked at the chart and the chart had done nothing for a year and a half because SPACs weren’t hot yet and no one knew this even existed and they didn’t know what Chamath, the guy who’s bringing this SPAC out, who brought that SPAC out, they didn’t know what he was going to acquire. So, they announced he was going to acquire Virgin Galactic and the stock went up to 12 and then it went to seven and we could have bought it at any time at that point. And here’s why we did. We started doing the analysis, okay top, down space revolution got to be in it. This is a leading company. Let’s go out, I live in New Mexico. I went out to the space port. I actually visited headquarters of Virgin Galactic. I get to know what’s going on around here, want to see the actual company. So I started top, down and now I’m going bottom up. Not bottoms up, but bottom, up and we’re going to analyze a company’s individual fundamentals and in order to do that you need to look at the founders, the company, the management, where they are. If you can go see them, great. If you can call them, great. If you can’t, you do what you can from your computer, keyboard warrior, investing warrior.
Cody: Virgin Galactic, like I said this is a heavily shorted stock. And like I mentioned a minute ago, if you’re in a heavily shorted stock, it’s probably up 20 to 150% today and Virgin Galactic would count. So, Virgin Galactic’s up, oh, I mean to show you my screens.
Cody: Share. Now are you seeing the screen?
Guest: Yep.
Cody: Great. So Virgin Galactic’s up 25% today and so when I started investing in the SPCE revolution I googled what companies could be coming public. What companies are public and I found SPCE. It was IPOA at the time. So I type in SPCE into google, SPCE. And you can look at it, do a little research. It’s good to just see, what are the top stories today? SpaceX is first private space group paying millions. Interesting. Everybody is talking about SPAC and the stock, yeah it’s not surprising. Now let’s go in and do a little fundamental analysis and I’m not joking, you can do all of this on Yahoo Finance. You don’t have to have a Bloomberg terminal. You don’t have to have subscriptions to anything. I’ve been doing it on Yahoo Finance for 20 years for free and I have a Bloomberg and I don’t have to do it on there. I learned, when I learned to do this stuff I was doing it on Yahoo for free. I mean I was broke. I was living in a rat-infested, rent-controlled apartment in Borough Park, Brooklyn when I started analyzing stocks and learning to do this stuff.
Cody: So, Yahoo Finance works, use it. If you’re familiar with Bloomberg, do it. But I’m going to just show you, look. Okay, so let’s go in here. 52 bucks a share, wow 26%. I hate buying a stock that’s up 26% in a day, but it was not at the time. So anyway, at the time you’re looking at and the valuation at $7.00 was one-seventh this. So it was about a billion and a half, two billion dollars when I started buying it as I recall. That’s one of the first things I look at, what’s the actual market cap of the company? What is the market valuing the equity in this company at? 12 billion right now, that’s not cheap like it was just at a glance. $12 billion is a lot of money for something that’s still a startup, I know that. So let’s go in and do a little SPCE. All right, so that’s where I start. I don’t even look at any of the rest of this stuff. I guess you can look at days range, 52-week range, get a sense. Even look at the chart maybe. Yep, yep interesting chart. We bought it right there. And we’ve ridden it and let’s go to financials.
Cody: Total revenue is one of the first things I looked at. Is the company generating serious revenue? No, no, no. Four million dollars people. This company is not generating any revenue. It’s worth 12 billion, it’s generating four million. Again this one is unique because it’s such a start up and it’s such a new revolutionary sector. Most companies you’re going to look at are not going to have no revenue, but this one does. So, I’m already like $12 billion market cap, four million dollars revenue. That's 3,000 times earnings or is it 300? No that’s 3,000 times revenue, starting at 3,000 times revenue. That’s not cheap. Clearly the market is expecting this company to do billions in revenue over the next few years. So, you have to take that with a grain of salt. So then the other thing I always like to look at is what the cost of revenue is, because then I can figure out gross margins. And a company that is incredibly profitable always has high gross margins, Apple being the one exception perhaps. Tesla over time could be too.
Cody: But this one’s not a good example again because this one doesn’t even really have a cost of revenue for last year. So there’s 100% gross margins, which is great. But more realistically their revenues, and you’re going to get a gross margin picture and that’s an important thing. A company that is over gross margins, gross margins that is over 50% I like. Gross margins that are below 30% I’m really going to have to like the company like I did with Tesla when its gross margins at the time were 15 to 20% when we were buying them a year and a half ago. Now they’ve gotten to say 25 or 30%. We’ll do Tesla next and do that. It’s a better example of what we’re doing. All right, let’s also hop over then, find out what the analysts are expecting. The analysts are expecting revenue to grow this next year from four million to, well they’re calling it 700,000. Let’s call it whatever it is three million, four million bucks. They’re expecting next year to grow to 27 million, which would be 3,500% growth.
Cody: So, yeah I mean clearly this thing’s about to turn on and it’s not on yet. So this is, again this is not your typical stock you’re going to analyze because most of them will have not these kinds of no revenue to huge revenue growth numbers. But this is a good example. We still need to learn to do this, so. A company is not profitable. Everybody’s expecting it to lose at least a $1.25 this year per share. Next year it might get a little more profitable. I’m not even sure those numbers are going to be right though because it could spend a lot of money ramping up, especially with the stock having gone to 55, the company could do a secondary right now, raise 500 million bucks and spend it over the next year or two and that would make these earnings decline because the company’s spending and to make the earnings, eventually that will more than make up for it, if it works.
Cody: So, this is a company that is trading at … The other thing I want to look at by the way. I always like to look at is the balance sheet. I just want to see if the company’s got a lot of cash and, or a lot of debt. So for cash just come in here, total current and its cash equivalence and that’s like treasuries and some things. And so, this company has already got, about half a billion dollars, 500 million bucks in cash sitting on the balance seat, sitting in a checking account essentially. And let’s go see we don’t want current liabilities. You want long-term debt and they’ve got $22 million. And so the debt is meaningless compared to the cash. They’ve got $500 million in cash and basically no debt which is fine, that’s great. That’s what you want. You want a company with no debt, especially these days. They should be earning a lot of money and putting it on the balance sheet or they need to be raising a lot of money and putting it on the balance sheet and that’s what this company has done, brilliant.
Cody: So great, they have half a billion dollars that they can invest already. I still think they should probably do a secondary right away, raise another half a billion. But a billion dollars in their balance sheet and have a billion dollars on the balance sheet and be ready to rock for the future. All right, I want to do that one. That’s Virgin Galactic, okay. So is it expensive? Yes, wildly expensive because it’s trading at 3,000 times revenues. But, it’s about to start turning on its revenue, so we got to take that for what it’s worth. Can this company earn billions of dollars in order to justify a $12 billion market cap? This is where it gets to be you’re not doing fundamental numbers anymore. Now you’re doing, now you’re talking about dots, analyzing concepts and markets, market places in your mind.
Cody: Let’s think it through. How many people are going to be able to afford hundreds of thousands of dollars for a space experience which is what the first year of revenue is going to be doing, is going to be generated from for Virgin Galactic. Not many, not many at all. So, again that’s not going to be the model. Over the long term, that’s clearly not what they’re going to be doing. So then you go in and you dig into Virgin Galactic. And this is what I’m born to do. Go to their website, just google it. Or it’s actually also on Yahoo Finance by the way. But, go to Virgin Galactic and look at their website. Oh, I need to get back on the share screen. Share screen, share. I’m going to hit refresh because I bet they’re launching, I bet this video launches. That’s over New Mexico. That is New Mexico people. It’s the only multi-billion company that I know of based in New Mexico, which is exciting for someone from New Mexico. There’s the space port. There’s the space port in New Mexico.
Cody: So let’s go. Look at the company, analyze it a little bit. What they do, vision, products, learn. Oh, they’re hiring, that’s always good to see. Companies that are hiring are probably growing. Who are we? Let’s learn, meet the team. Get to know the people who are doing it and in this case it’s a very famous Sir Richard Branson that’s the founder and leader of the team. He’s not even going to be on here. He’s the chairman I guess. But, then you want to look at these guys. They recently hired a new CEO I happen to know, a guy who’s more aligned with Disney (DIS) and entertainment stuff than engineering stuff, which is probably a good idea at this point. The company is going to start doing commercialization stuff.
Cody: So if you dig into it, what you’ll find out is that Virgin Galactic is not just going to be shipping people to the edge of space for hundreds of thousands of dollars long term. They’re going to be trying to figure out ways to do supersonic package shipments. They’re going to try to figure out how to get you from Florida to Abu Dhabi in an hour. And then who knows? It’s sort of like I used to talk about with the app revolution. For many years, I would say I don’t know all the incredible ideas that people are going to come up with to use on an app, on that smartphone platform. But they’re going to have wild and cool and cool, crazy stuff that you’ll be able to do that we haven’t thought of yet. And that’s the same thing with space. There’s going to be a lot of innovation that we don’t even realize yet. We don’t know all the ideas and revenue generation models for Virgin Galactic and as I start describing this, I get very comfortable that oh, my goodness these guys could do billions of dollars.
Cody: Now, it needs to somehow make billions of dollars, not just generate the sales. So when it was going for two billion dollars, the market cap when we were buying it at seven bucks again back in the day. I talked with subscribers a lot about why I felt like that was a good valuation. And it’s in large part because you could picture it as a venture capital thing. If you put some seed money in here in a few years, it could be worth even much more. And so it could be worth tens of billions of dollars because at two billion dollars it’s basically a four level for a company that’s already got some technology established and money and Richard Branson at the head.
Cody: Now it’s a $12 billion market cap, so it’s worth tens of billions. So part of that move’s done. It’s up 800%. Valuation is not that attractive now. Now you really for it to be a wonderful buying opportunity at 55 bucks, I want to feel like, “Hey I could be a 10 bagger.” For this to be a 10 bagger, now we’re talking about $100 billion or more valuation. That’s hard. That means the company’s going to need to generate tens of billions of dollars in revenue in the next five to 10 years. So, valuation matters. Valuation matters. This is why we go through this whole process. I probably shouldn’t have started with space now in retrospect because it is so unique. Let’s go do Tesla.
Cody: People ask me, “Is Tesla cheap Cody?” Let’s do it. I'm going to share my screen again. Share. Space Port New Mexico, Space Port USA in New Mexico that’s what it’s called. Okay, Tesla, I typed space because I was saying the word space. All right, Tesla you google Tesla same thing. You know it. I mean everybody knows Tesla these days. Back a year and a half, two years ago you probably knew it was Elon Musk, maybe. Now he’s the richest guy in the world, so everybody knows him. Elon having some fun today, as often he does talking trash to Wall Street. It has nothing to do with Tesla. Let’s go, let’s just do the hardcore fundamental analysis. That’s not the right link. Let’s go to Yahoo Finance, same thing again. At the time when we bought it, it was a 30. This was 30, 30 billion when we bought that Tesla the shares a year and a half, two years ago. Now you put an eight in front of that and it’s almost a trillion dollar company.
Cody: Again, the first thing I look at is the market cap just to get a sense of things and there’s what, five companies in the entire world who have ever been worth a trillion dollars and this might be number six. That’s rarefied air. That company needs to be killing it, doing the best earnings growth, revenue growth, changing the world, revolutionizing things for years to come to be one of those five companies that has ever been worth a trillion bucks. Let’s go look at some financials. Get a sense of gross margins, what do you say people? So you look back a few years ago four years ago, three years ago in 2017, the company was doing 12 billion in sales, 11.7. I round numbers because I’m going concepts, I don’t care about single digit percentages. So $12 billion in sales and it’s costing nine and a half billion, which is not very good gross margins. Less than, what is that? Just over 14% or something 15% maybe at best. Then it got a little better, almost 20% here.
Cody: Then it gets over here and you’re like, “Eh, it’s almost 20% again.” And now we’re like, “Hey, we’re over 20% in the last trailing 12 months.” I like that. That’s the trend I wanted to see when I was buying Tesla. I think they were about to turn the corner and start getting much more profitable. That’s happening. Good, all right I like this stock idea. Okay, good let’s keep going in. Let’s get some financial valuation analysis now. Go over to these analysts, these analyses, these analysts, analysts. Number of analysts 24 covering, a lot of people covering this stock these days. They’re expecting it to earn $4.00 next year. The company has got an $800 stock price, four 800. 878, let’s call it 880 divided by four, 220. A 220 PE, price to earnings ration forward PE. From this year they’re expecting $2.00. So 440, 400, costs $2.40. Call it a 400 PE on this year's earnings which I always try to look at forward.
Cody: And then even try to think out the next year even. Two, four, how many cars could they sell in the next year. What gross margin assumptions can we make? And you can model it out in your mind and end up with six or eight or 10 bucks. I don’t think Tesla is doing $10.00 in earnings next year. Six or eight is possible. So let’s call it normalized, go out two or three years in your mind and say it could be 10. It’s still at an 88 PE. It’s four years out, five years out its PE is still 80 or so. So, again very expensive. Traditionally you want to buy a stock, I mean Graham an old traditional Warren Buffett guys want to buy single digit PEs and sometimes you get the chance to do that, even in great companies like Tesla or Apple when I first bought it. But, more often than not the PEs are going to be higher than that for high growth companies that I like to find.
Cody: But again, if you can wait the whole thing that we do with Training With Cody and that I’ve done with my career here throughout, has been to wait until you get the good valuations and then buy. You can start a little bit, but wait until those valuations get to 10 or 15. The PE in your mind, two years out the PE’s 10. The PE’s five and you get those opportunities. 10 years ago Apple was trading at a five PE in my mind. Facebook when I started buying it, you can go find the analysis I wrote when I first started buying Facebook and I would explain to people how it was trading at 10 times two years out earnings, which made it free because I was going 30, 40, 50, 70% per year top line. Training With Cody subscribers remember that I hope. So, let’s look at the growth rate, $30 billion this year. Well let’s look at the valuation, the price to sale. Revenues to sale, sorry. Revenue to price, sales to price, price to sales revenues numbers here.
Cody: So, 30 billion, you know the market cap like we said was 830 billion. So it’s trading at almost 30 times this year’s top line estimates. Next year it’s supposed to grow 50% to 45, call it 50 billion. So it’s trading at 800 divided 50, 13, 14 times next year’s revenue estimates. So again, very expensive. Revenues are always, your revenue to … your price to revenue multiple is always going to be lower than your earnings, price to earnings multiple because the company has costs, top line is revenue. So, at any rate, it’s still very expensive. 14 times next year’s sales is not cheap, even for a company growing 50%. So, that’s how I do this. That’s it. There’s no magic here. People ask me on Training With Cody chat every week, “Cody will you look at,” and I’ll take two stocks from you guys now, and that’s how I get to where I go. That’s how I do the fundamental analysis.
Cody: Now with Tesla again the top, down analysis was like I was sitting there looking, they had just released the model three at 35, 40,000 bucks. Full self driving was getting really more capable and the prices were starting to go up for full self driving and I bought the car, I bought that car. I actually paid 55 for the model three with all wheel drive because there’s six inches of snow in Ruidoso today, that’s why you need all wheel drive where I live. But, look I bought that because I wanted to test it. I didn’t want the S, I didn’t want the X. I wanted to test the mainstream car and was it ready to revolutionize the mainstream buyer? Could it have hundreds of millions of people buy that car in the next five or 10 years and the answer after I bought it and tested it and drove it for a few days as subscribers can attest was hell yeah. Yeah it’s changing everything. All right questions and, or a couple of stocks you want to talk about?
Speaker 3: Hey Cody, in that last example when you were doing the price, were you using the price divided into, or I’m sorry. The $46 billion number, whatever that was there, I think it was the revenue estimate. Were you dividing that into the share price or the market cap?
Cody: I was doing it into the market cap. That’s a good question because Tesla has just about a billion shares outstanding. So in its particular case its market cap is 800 something and its stock price is 800 something.
Speaker 3: Right.
Cody: But most of the time you go to Apple and its stock price is 1.4 and its market cap is 2,400 billion or 2.4 trillion. So, when you’re doing that, yeah you’re looking at let’s go back to the … Let’s do Apple real quick. Let’s just do price to sales on Apple. So you got 2.4 trillion and the analysts next year are expecting 330 billion. So, eight times next year’s right? Eight times 300 is 2.4.
Speaker 3: Got it. Thanks.
Cody: Other questions?
Speaker 5: Cody, I have a question.
Cody: Yes?
Speaker 5: So just going through that exercise on Tesla, right? So that would from a valuation standpoint it seems Tesla is we’d say overvalued from almost every metric, even when you project out the next five plus years, right? So at that point, at what point do you say, “Okay we should be taking that out of our portfolio?” I know it was a great buy a year plus ago, but at this point are we basically just banking on the market to continue to be irrational or what point should we be moving on?
Cody: Yeah it’s a great question. It’s a great question. The answer is I’ve learned over the years that when you find one of these disrupt, not disruptive I don’t like that term. It’s not big enough. One of these revolutionary companies that’s changing the world; Apple, Google, Facebook, Bitcoin. Not a company, but you get the point. You trim, you hedge along the way. But, I’m betting on Elon and Tesla probably forever. I don’t plan on selling the stock and here’s why. Even with Tesla and it is such a revolutionary concept that’s about to do something that no one else has. If they conquer that self driving, it’s a multi-trillion dollar market cap the next day. When you can summon your car … If you paid, all in you bought a $35,000 model three and you pay, what is it 10 grand right now for full self driving? You pay $45,000 for your car and next year it’s generating $200,000 of income for you when you let it drive 24 hours a day around the town when it’s not charging and doing autonomous people and, or food delivery stuff.
Cody: The Tesla is worth more than you bought it for and that’s one of the things that Elon’s talked about over the years that people don’t take serious. But the concept is real, that if you buy the full self driving car and they conquer it, your car probably doubles in value, triples in value. The car’s worth more than you bought it for. That’s something that’s never happened. Can you think of another product that’s ever been designed to do that? So, there’s something more revolutionary potentially about Tesla than there is than probably any other company I’ve ever owned. Because when you bought an iPhone it didn’t get more valuable five years later, as revolutionary as the iPhone was. Next question.
Speaker 6: Hey Cody, how do you give the score to each stocks? I know you give Tesla a six plus right now and SPCE’s a seven or an eight. But, in terms of execution, Tesla seems to be at a much better place than compared to Virgin Galactic. So, how does execution, manufacturing capability, ability to conquer challenges, how do you factor that into your score?
Cody: Okay, so what he’s asking about once a month, once every six weeks or so I do a review of each of the positions that we have and when I do that I give each one a rating between one and 10, 10 being the perfect investment. There’s never been a 10. Closest thing there is to a 10 it says at the top of every one of these articles I ever write is investing in yourself. But, aside from that, let me go back to speaker view here. There it is. And six gets to be something I probably don’t want in my portfolio. Five is an average stock and if it’s … I mean obviously I probably don’t ever have anything below five in those things because if I ever think something is not average even, I’m out. That’s when I sell it. Going back to that question earlier about when would I sell Tesla? It would be if I decided it was not a good company. It would be if I decided something was wrong about my analysis.
Cody: So, those ratings are reflective of the near term, more so than long term. Those are just like, “Hey in the grand scheme of things is Tesla a grade trade, a great investment at $900 billion market cap where it is at this particular moment?” And the article you’re talking about I think Tesla is probably actually about around 750, and so its rallied even since then. And SPCE when I wrote what you were talking about I think was around 25, because that’s two or three weeks ago that I wrote about it.
Speaker 6: Yeah that’s right.
Cody: Yeah, and so I liked it a lot better at 25. Now at 55 today it’s not an eight. Not even close. SPCE as of today would be a six plus also.
Speaker 6:Okay, thank you.
Cody: And it’s an arc, right? I don’t have … there’s not a formula, an algorithm that I punch stuff into and I’m like, “Oh, it’s a 4.5.” No this is arc. I’m painting, I’m doing my best Dali impression. Deep thoughts, Salvador Dali art. It’s probably what’s going on in my head if I had to guess.
Speaker 6: Thank you very much for that, thank you.
Cody: Another question. “Do you foresee any new affordable stocks to recommend, good value stocks?” And the answer is yeah, absolutely. All the time I’m trying to find them. But, I let this analysis work, I don’t just willy-nilly buying pick them. Here’s the other question, “Can you demo and analyze how you consider, do a value stock for as a comparison to say Tesla and SPCE,” which are not values right now for sure. What is a good value stock right now? Apple’s not even a good value right now.
Cody: I got a traffic jam about to happen in my parking lot. Anybody? I don’t even know value stock. JWN, a good buddy of mine talked about JWN the other day at 35, I should have bought it. You want to do it? Let’s do it. I got to go back to share screen, don’t I? JWN, Nordstrom. Nordstrom’s malls. But they’re not just malls. Other reasons to own it. Let’s look at it. We start off market cap $6 billion. So imagine that Nordstrom is half the value. Nordstrom after all its years in business is worth one half of what Virgin Galactic is worth. Market says your entire company Nordstrom, I say that funny don’t I? Nordstrom, like Sen. Strom. Saying Strom strongly. Let’s go to the profile, what is Nordstrom? Fashion retailer provides apparel shoes, cosmetics and accessories for women, men, young adults and children. It offers a range of brand names and private label merchandise such as Nordstrom Inc., Nordstrom Rack, HauteLook, Jeffrey Boutiques, Clearance stores that operate under last chance, Trunk Club. So it’s a retail, clearly it’s a retailer.
Cody: So, six billion dollars, let’s go look at its gross margins. Gross margins used to be pretty good over there, look at that. That’s 15, nine, what you got about 30% gross margins, 35% gross margins back in 2018. Nice. Fast forward to today, last 12 months clearly the pandemic’s been hurting. That’s probably not indicative so let’s go back to last year, and that’s year ending January 31, 2020 so that’s last year. Those gross margins were still pretty good. I like that. For a retailer, I don’t mind. 35% gross margins is pretty good for a retailer. All right, that’s interesting. Let’s see what the analysis looks like. This year they’re getting killed, but sales were down 30% this year because of COVID. So that’s not, you can’t really extrapolate that out very well. Then you look at next year and they’re supposed to hop 26%. Now let’s do the math by the way does 31% if you drop 31% and grow 26% you’re not even close to getting back to even. You’re not five percent away, you’re still 10 or 15 percent away, right?
Cody: 100, you drop 31, goes to 69. You add 26% of 69, that’s not 26. 18, 20, call it 20. So, 20 plus 69, you’re at 89%. So their sales next year even with them growing 26% are going to be down 10% from that year before that we just looked at 2020. Follow me? So, this is a company that’s still not getting back to even next year, interesting. Is the stock back to even, or was it before COVID? 60ish, now it’s 40. The stock’s not back to even either though. So, I’m thinking out loud guys, you asked me to do this. So, next year they’re going to earn a buck because again they got killed by COVID next year. That’s going to rebound next year. They’ll probably figure out how to be more profitable. A buck forty-seven, the stock’s trading at 40. What’s its PE? 40 divided by a buck fifty somebody? Anybody? 15.
Speaker 3: 26.
Cody: 26, 25? 25, 26? Thank you. Mid-20s. I mean hey, compared to the other stuff we’ve been looking at there’s some value here. It’s 20, I’d rather it be at eight PE then you’d be like, “Wow I’m really buying for eight times next year’s earnings? Let’s do that.” 20 yeah, for a company that’s not even getting back to even. Okay, but why would my buddy like it? The guy who talked about it is brilliant and I take things serious when he tells me to look at things. He’s figuring that look, the omnichannel being able to sell things at the curb and shipping it to you, Nordstrom Rack and Nordstrom.com and their online initiatives are kicking off and this company’s dominant. It’s going to do it. It’s going to pull it off. Now, is it revolutionary? Clearly not. This company’s not changing the world, they’re selling clothes and maybe they do a great job at it. Maybe that’s right for a lot of people.
Cody: And there are times if Nordstrom was at $8.00 right now and this thing I believed was going to earn a buck fifty next year, great trade. I’d totally consider being optimistic and buying it at that level. At 15 bucks and be trading it at eight times next year’s earnings. Yeah man, something like that I’m in for what $12, would be eight times the actual earnings. But then you got something to hang your hat on. By the way, you should just check the balance sheet. I’m going to guarantee you it’s going to be ugly. It’s a retailer that owns a lot of real estate. Going to have mortgages. Balance sheet. Total assets, current assets, cash 800 million bucks. Nothing. Long-term debt, four and a half billion dollars. Now again a lot of that’s mortgages, although look they did something the years before it was two and a half billion for years. What’d they buy? They must have bought something. They probably did an acquisition for two billions dollars right before COVID hit or something.
Cody: Let’s just check. GWN acquisition. No, it doesn’t say anything. Let’s type in Nordstrom acquisitions. See why did they issue all that debt? Does anybody know who’s listening? I mean I clearly don’t follow Nordstrom closely. So I’d love if somebody knows. I guess we could type in Nordstrom debt. There it is acquires two digital, what do you want to bet it’s about two billion dollars. Terms were not disclosed, but you can extrapolate out. They added two billions of debt after doing those acquisitions. So maybe that’s what it was. Anyway, there you go. There you go. The debt scares me too. It’d scare me a lot more if it were not a retailer that has mortgages. But even that, look I like to buy things with really clean balance sheets and this company has five times more debt than it does cash and that’s not clean.
Cody: More questions? When you recommend buying in three tranches what are your thoughts on timing of those buys? It’s an art more than a science again. Sometimes I’ll buy three tranches in a week, sometimes it’ll be over six weeks. Sometimes the stock takes off and I’m like, “I don’t think it’s coming back down. I better do the second tranche right now and other times it comes down and I’m like, “I’m going to space this out a little bit because I think we might have a little more coming down.” And again that’s again where you’re doing a little bit of artsy stuff. There’s no science to all of this. There is science to some of it, but not to all of it. You guys were just asking about stocks. Let’s analyze one more stock together unless you guys have any other questions and then I’ll wrap this up.
Cody: No other questions. Okay, here’s one in the chat that’s a good one. “Cody could you give guidelines for price to sales and price to earnings and what numbers are good, what are bad and what makes something a buy?” Again it’s art. If a company is growing, here’s some general metrics I’ll throw out there for you. If the top line of the company, if the revenue is growing 30% to 40%, 50% per year or more, price to sales well okay. This is a great question. You got to also look at gross margins, okay? Because if a company has 90% gross margins, I’ll pay a hell of a lot more relative on the price to sales, versus a company that’s got 30% gross margins. Because if 90 cents out of every dollar of sales that you generate is falling to the bottom line as earnings, the price to earnings is going to be pretty close to the price to sales too. But if the gross margins are 10% and you’re a distributor and your net margins are one percent, you’re trading at half times sales. Your sales are $10 billion and your valuation is five billion.
Cody: Oh, we didn’t do JWN. Let’s go back to JWN real quick and do its, did we do price to sales? I don’t think we did. I’ll just do it. I’m not going to switch the screens again, but let me do it. JWN, go back to where we were here. There it is. And they’re expecting $13 billion in sales next year and the company’s worth six billion. So that company is trading at one half times sales. Tesla trading at 40 times next year’s sales, or was it 20 times? But you get the point. And SPCE trading at 3,000 times sales. And amazingly I think SPCE is a better value, even at that, even right now than I do think JWN is a value at this moment, a good investment. Doesn’t mean I’m right. JWN, again I respect that guy who told me to buy it. It’s probably going to 100, it’s just not for me.
Cody: All right, one more stock. Someone asked me for the last one, two people asked for JMIA, Jumia. It’s another name that we killed. Bought it at 15 bucks two months ago and now $60 today, a new all time high. Oh, I need to share screen. Share screen, share. Five billion dollar market cap. When we bought it, it was just about a billion and something dollar market cap. So, valuations are not going to be very good, I’m going to tell you right now because they were pretty good at 15. But now it’s up four fold. So, profile just I don’t know if you guys Jumia. Everybody knows Tesla. Jumia is basically like the Amazon of Africa. An e-commerce platform in Africa. It’s also a Shopify play game in Africa. It’s going to help people. It’s going to help create a middle class in Africa. That’s one of the reasons I bought it, wrote about it at the time. I like it. I like that idea of creating a middle class around the world, getting people out of poverty, letting them eat.
Cody: All right, Jumia and not just around the world. United States got hungry people too. We got to feed them. I don’t know if it’s the government’s job. Maybe it’s the church’s job. Maybe it’s somebody’s job. Kids got to eat. Jumia, losing money, $2.00 this year and basically $2.00 next year. Company actually shrank this year. Did you hear about COVID? They’re going to grow 30% this year. Now if they shrink five percent this year and they grow 30% next year, they’re still way ahead where they were when COVID started unlike Nordstrom. So, $200 million in sales. What did we say the market cap was five billion. So, 50 times next year’s sales estimate and it doesn’t even have an earnings estimate. So, again like 50 times next year’s sales is expensive. You need to grow a lot to justify that. I think this company can do it. Let’s see what their gross margins are. You see there? 70% gross margins. You can pay a higher price to sales ratio if the company is 75% on gross margins than one with 35% gross margins.
Cody: So, if you believe that Africa can turn into a multi-trillion dollar market economy and I mean the entire continent, although it will take some countries doing their more than fair share, because as always there will be places that are corrupt and awful and poverty stricken. Hopefully not forever, but some places in Africa are going to do much better than others and where this company focuses, hopefully it’s those places and it’s part of the solution. And if that’s the case, this company could do tens of billions of dollars in sales and kick up a billion dollars or so in earnings some day. And then it’s a good value at five billion dollar market cap. But it was a better value at a billion dollar market cap. I’m exhausted. That was a lot of work. What’s our markets doing? Have they bounced at all? A little. Boy RUT’s barely down. Small caps baby. Why did that go to there? Any last questions? If not I’ll thank you guys for being here.
Cody: All right, I got two last questions simultaneously. I will take the one that I heard and then the other person, whoever was asking, please hop back in. I found Jumia, I even though Jumia looked like a good short when it first came public, a subscriber had asked me about it probably two or three years ago and I never forgot about it and I waited. It was at 40 or 50 when it came public and I waited and I waited and it went down to like five. I think I was even short a little while. And post-COVID this summer, I was looking for good ideas at reasonable valuations and it was still on my screens. Next question?
Speaker 8: Hey Cody, do you consider the Yahoo Finance one year estimate numbers in your calculation?
Cody: The next year estimates, yeah. Yeah that’s what I was using most of the time. I generally look at those analysts. Here, I’ll go back one more time and share the screen. Yeah, this is when you’re looking at next year numbers, you’re going to … this used to be called analysts. They changed it a couple of years ago or a year ago to analysis. I liked it better under analysts because it was analysts’ estimates, all of this is analysis. Anyway, you’re out here and you’re looking at next year’s estimates. Does that answer your question?
Speaker 8: No the main screen you see if you click on the summary page, there is a one year stock price estimate. That’s the number.
Cody: No, no, no, no, no. Like I said, only thing you’re looking on the front page is market cap. I don’t look at anything else on here.
Speaker 8: That’s it. Thank you.
Cody: Where is it? I don’t even see it. One year target estimate, $25. I suppose that’s taking the Wall Street analysts and giving their average price target. And as subscribers will tell you, I don’t care what other analysts think. I’ll read it and try to learn from it, but it’s not really going to drive my analysis, not going to change my mind. I don’t care what Wall Street thinks the stock price should be.
Speaker 8: Okay, thank you.
Cody: Good question though. Thank you.
Guest: I have one.
Cody: Sure John.
Guest: Great. Are you worried about SRAC being a SPAC? I’ve got a lot of people telling me they’re really worried about the SPACs because you really don’t know what they’re going to do.
Cody: I think you take each SPAC individually. The semiconductor industry, that you can talk about. SPACs include electric vehicles to space to SoFi finance to material. So I give each SPAC individual analysis. I’m always concerned about every one of my positions. SRAC is a small part of my space revolution basket at this time. But I like … I feel good about this current price in SRAC as a potential big return long term. Again you need to picture it as a venture capital play. Doesn’t have any revenues. It’s dreaming that it’s going to be able to do, like move satellites around in outer space using water streams. We’re talking some out there stuff. But, if it works it’s going to, this valuation is reasonable.
Guest: I bought some.
Cody: If it doesn’t work it’s going to zero. What’s that?
Guest: I bought some, thank you.
Cody: Yeah. Well and be careful. Because again if it doesn’t work in two years the stock’s going to be at zero.
Guest: I understand. I bought more SPCE.
Cody: Yeah. Yeah you got to bet on Space and I don’t mean the SPCE just Virgin Galactic. You’ve got to divvy it out and for the record in my hedge fund, by far the largest Space position we’ve got is SpaceX. We did a bunch of work a couple years ago to invest in SpaceX in the private markets and then another one called Relativity Space that is also private market. So, they’ve both done very well since we invested in them also.
Guest: Thank you.
Cody: Anybody else? Last dibs.
Guest: Cody?
Cody: Yes.
Guest: The Momentus SRAC, the CEO and the Russian CEO he resigned. How does it change anything at all? If you look at the company, it says if he resign if he cannot get that, what do you call that, the asylum whatever, that it might affect the program.
Cody: I’ll hit on what you’re getting at Vince. Look, the CEO, the founder of SRAC, the same company we were just talking about that could go to zero if it doesn’t work over the next two years or maybe three years, the CEO’s a brilliant Russian citizen. And there’s no way the United States government is going to allow a Russian national to have access and, or contracts with NASA. So, he needed to leave. He either needed like you said to get asylum of some sort or he needed to get green carded or something. He needed to get in the system of the United States citizenry or he needed to get out of the way. Whether it was his choice or the United States’ government choice or the Russian government’s choice which I think it probably is, he’s not going to be allowed to come. So, I don’t think, he’s not Elon Musk. If Elon left, Tesla or SpaceX, I’m gone. But, this ain’t no Elon Musk.
Cody: All right guys, that’s it. Thank you so much. Clearly I don’t have a crystal ball. Clearly there is no science to valuing stocks. But I hope today gave you some grounding and just even perhaps a review for some of you of some of the things you might have forgot to look at sometimes.
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