TIP795: Berkshire, Moody's, & BellRing Brands w/ Stig Brodersen, Tobias Carlisle, and Hari Ramachandra

20:44Stig Brodersen:And Reg FD kind of eliminated it. And he compared that and said, hey, look, Buffett's returns pre-Reg FD were way greater than S &P 500 at around 24 % or so annualized. But post-REG FD, his returns were on par with S &P 500. So even Buffett could not really beat S &P 500. And that was when Berkshire was still much smaller back in 2000 and later. Now with a trillion dollar market cap, with the size they are, it's also mathematically very hard for somebody like Greg to say, okay, now I'm going to beat S &P 500 over a long period of time.

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24:59Tobias Carlisle:All right, back to the show. Yeah. Thank you for your comments, Jens. I just wanted to also mention that whenever you are comparing compensation, it's really, really tricky. to do that. And to Hari's point, I feel that Buffett should be applauded for only taking $100 ,000 in compensation. And then I think he had like$300 ,000 in other expenses. Or I think it's the proxies would say other compensation, but he's been famous for the $100 ,000. I kind of feel like whenever you hear those numbers, it's really important to understand where that's coming from. You have all these high flyer CEOs, tech bosses, and they're like, oh, I only get like$1.

25:42Tobias Carlisle:And you're like, yeah, but you also founded the company. And if you reach these milestones, you're going to get like, what is it, a trillion dollars or whatever. And yes, I know that's going to be really difficult to achieve. But it's like, whenever you have so-and-so many shares, it's a different game. And I think you have to understand that as you're comparing conversation between different CEOs. Anyways, let's talk a bit about valuation. So first, you normalize operating earnings, and then you apply an appropriate multiple. So if I use 40 billion here on the operating companies that use a multiple of 17, I come up with 680 billion for those businesses.

26:21Tobias Carlisle:I would like to think that is directionally correct. I'm definitely sure that some would use a different multiple and a different normalized number, and I think that's perfectly fine. And then in the other bucket, you can look the value of equities plus cash and then deduct that. And of course, you can then make an adjustment to what you think the intrinsic value is of those equities. And so if you look at the top holdings, you have Apple, American Express, Bank of America, Coca-Cola, and Chevron, then you could be like, oh, you probably want to start there. They're roughly like 70 % of the value of the equities, and then you can make your own adjustments.

26:56Tobias Carlisle:But if we say that you have roughly 500 billion in equities and cash net. Then you end up with something like 1.2 trillion-ish if you round it. And who's counting when you're talking about disillpoints of trillions of dollars? But the back of the envelope valuation gives you a number around$550 for Abesia. At the time of recording, Abesia is trading at$497. It's close to a rounding error if you're plus minus 10%. It's roughly reasonably valued right now. And so it sort of goes to the point I had there about risk. There's a lot of high flyers out there, lofty valuations. Berkshire is not one of them.

27:43Tobias Carlisle:Of course, the future is always uncertain and it's no different today. But that might be a good reason why you want to own Berkshire in the first place. And Berkshire typically does well in bear markets. And you also see that and sometimes the market is selling off and there are a few companies or not. Some of them are Berkshire. And I attribute that to, if you're looking at the investing mandates in a lot of funds, their equity zone, you are part of this equities, and they have to be placed in some kind of equity. And so it's very reasonable for a lot of S managers that if you don't really know where to put it, some of them just put it into Berkshire, sort of like as a wait and see type bucket.

28:22Tobias Carlisle:And the drawdowns you see are typically not that dramatic. It's probably not lost on the listeners that Berkshire had the capital to buy back, huge amount of stock if the price is attractive enough. And I don't have any concerns about Greg Abel not being able to do that. I think he very definitely understands the value of the stock. Robert Leonard Leonard And then also, Berkshire shareholders, they've been trained for decades now how to think about intrinsic value. So we've seen that multiple times whenever the market is selling off. Berkshire typically is not allowed to be at a huge discount for that long.

28:55Tobias Carlisle:And so that also goes into my point here about perhaps for some people, such as risk-averse people like myself, or so I'd like to think, it might be a good placeholder for cash, especially if you don't know where to put it, or if you have a mandate where you need to invest in equities. I would imagine that if we're talking about valuation, you can probably expect to get something like a 10 % normalized return moving forward. Of course, that varies from year to year, but it sort of gives you a sort of a yardstick, what to expect. And then at least the way that I use Berkshire is that if I don't really know what to invest in, sometimes I would just invest in Berkshire.

29:37Tobias Carlisle:And then if something sells off, you have a lot of software companies that are selling off right now. And I guess we can talk a bit about that later. But if something you really like goes on sale, perhaps you want to trim some of your Berkshire holding and start building position something else. So at least that is how I'm looking at it. And also, I do tend to run a pretty concentrated portfolio. I currently only have five individual stocks. I also have a few other things in the portfolio. But whenever you run a concentrated portfolio, perhaps you want to have something that's somewhat anti-fragile in that portfolio, and Berkshire could be one of those.

30:12Tobias Carlisle:So Buffett has famously said that that's not how you become rich, but perhaps you will stay rich. And I kind of feel like the way he's looking at utilities, that is perhaps the way you can look at Berkshire today. It might be a stock you once held because it could make you rich. That's not the case anymore, but perhaps you could stay that way. So anyways, Jens, I want to throw it back over to you guys.

30:39Hari Ramachandra:Yeah, I've fallen about the same place with the expected return about 10%. And I agree, 10 % is still a pretty good return, but it's equivalent to holding the S &P 500 with maybe a slightly different characteristics. As you point out, it's not going to draw down as much probably in a bear market. It's probably not going to run up as much in a bull market. You're probably going to get more of a less volatile ride, but growth is certainly slowing and they've got a lot of cash there. So, they're going to have to figure out what they do with that at some point, it's hard to imagine that even in a crash, something big enough becomes available that they can really put all of that money to work.

31:16Hari Ramachandra:And buybacks aren't going to move the needle really either. So, at some point, there's going to have to be a special dividend or some dividend probably. I don't know how long they can sort of sustain that no dividend policy, but five years later, maybe. Does a dividend become possible five years later? Probably. Something like that. I think it's definitely worth looking at it. As you point out, the value is distinct from the S &P 500. That's one big thing that we didn't discuss that in the compensation, but I always think if you're going to take over a business, you want to take it over when it's completely busted and the valuation is the multiple is as low as you can possibly get it.

31:51Hari Ramachandra:You don't want to take over a high flyer because then you're fighting the valuation as well as sort of help trying to run the business, which is why I like measures of compensation that are internally that they have some control over. You want them focusing on those kinds of things. so berkshire is much much cheaper than the s &p 500 and i think that like we discussed stick that'll be the thing that has the most impact over the medium term three five ten years beyond that it's the quality of the businesses and it's hard to know where they're going to be at that point but i tend to agree on the valuation and the return front yeah i agree i

32:26Stig Brodersen:think especially stick the point you made about a parking space for your capital till you find good opportunities is a good framework to think about Berkshire as. Because if I want to have it in my long-term bucket, I would rather have S &P 500 where I don't have to really worry about, okay, I need to move this capital around. But if I am looking at it as a placeholder, then definitely, yes, I would definitely favor Berkshire both from a valuation perspective, as Toby was referring to, which is lower than S &P 500. And also from a downside risk protection perspective, because if there is a drawdown, number one, Berkshire tends to get hit less harder on the downside, but also they have the cash hoard, which can be an opportunity and a drag.

33:21And maybe Buffett will get lucky again, similar to what he did during the financial crisis

33:27Stig Brodersen:that he can get some of those few elephants that he is looking for, especially as we are seeing a crisis in the private equity funds now. A lot of private equity firms are struggling. That means there is less competition in the private markets in the short to medium term, which might present a good opportunity to Buffett. Even though he says he's not the CEO, I'm pretty sure he cannot not contain himself from deploying that capital when the right one arrives.

33:58Tobias Carlisle:Thank you, Hari and Toby. I think another stock that you definitely want to hold or consider holding if we do see a downturn in the market might be Hari's pick, but that's going to be a cliffhanger because I know you're going to go next. Toby, I'm curious to hear what you're going to pitch for us today.

34:17Hari Ramachandra:My pick is Bellring Brands. The ticker is BRBR. it was spun out of post holdings so post holdings is this it's been around forever consumer package goods they have everything from like cake mix to they used to have these this business under its umbrella and it's kind of interesting because they talk about they you know they have they can see consumer behavior through various different events so through covid they saw everybody kind of went away from the healthy stuff and started buying all of the cake mix and all of the that sort of stuff and then everybody got too fat and decided they had to go back to the healthy stuff.

34:53Hari Ramachandra:So what Bell Ring Brands does, they're pure play protein. So their main thing is the Premier Protein. I see these things around and I heard some influencers talking about these. It's just like a milk drink that you can find in any convenience store or supermarket and they're very high protein per serving and low calories, low sugar. And so, they're the thing that if I am out and need something, I'd grab one of these things and drink them because they're reasonably, just help you meet all of your macros, do whatever you're trying to do. So, I quite like them. And so, that's not how I found this business.

35:36Hari Ramachandra:I found this business because it's financially, it's very cheap. It's not an unusually good business, sorry, but it's a good business. I like these kind of little industrial businesses that are very simple, like basically pure play. The problem with this one is it's very small. Market cap's$2.1 billion. In December 2024, so a little bit over 12 months ago, this thing was trading over$80. It's currently trading around$17. So it's had a huge fall from grace. I can't really work out why that's happened. There's nothing obvious to me why that has happened, but it's probably something to do with the GLP-1 shots that folks are taking.

36:18Hari Ramachandra:I'm not sure that if you take the GLP-1 shot, you wouldn't continue to drink this stuff because you still need to get a certain amount of protein every day if you're out and about and you can't get access to your protein. And this is probably the stuff that you're going to drink. The brand's pretty well known among folks, so that's important. they've got distribution which is hard to get they've got distribution on new like there's on in the little convenience store near where i live it's it's in there that's pretty well distributed so those two things like that's the old classic formula for consumer packaged goods pretty good brand pretty well-known brand and pretty good position in pretty good distribution position in aisles and all that sort of stuff that's less important now i I get that there's social media pushing different proteins and there's a lot of competition in the space.

37:11Hari Ramachandra:So, the business is good. The business isn't great, but it does earn pretty high returns on invested capital. It's like 80 % using the Greenblatt measure because they don't do their own manufacturing. They outsource all of their manufacturing. So, that might also be a risk, but it's worth sort of mentioning that it's a very small business. I think the valuation is way too low for the quality of the business. I think that at$80, it was too expensive. By two times, at$17, it's too cheap by about half. It's an 11 % free cash flow yield here. EVB, it's 10. EVB, it does nine. PE is 12. So on any sort of metric, it's cheap.

37:55Hari Ramachandra:It's certainly over-earning on its invested capital. Pretty good brand, pretty good distribution. and I don't really know why it's sold off as hard as it has, but I think that it's one of those things that could easily be a target for private equity because it's got a big shareholder in post, so it can't do that. It's not going to happen in a hostile way, but it's one of those businesses that it's pretty easy to run. It's the sort of business that attracts private equity, I think. But even if that doesn't happen, they've got a pretty good track record of buying back stock. It's well managed. I like it as a business, I think it's a reasonable bet at$17.

38:31Hari Ramachandra:I think it's good risk adjusted bet.

38:34Stig Brodersen:Yeah, Toby, very interesting pick. I don't know how you find these gems. It's like from$79,$80 to$17. That's a big drop. I'm just curious, like number one, why did post holding spin it off? Is it because it's too niche a player, number one? Number two, and does that factor actually protect them from somebody like Pepsi or Coke making a play into healthy drinks? Is it too small for them? Because I don't understand their distribution and how it is compared to a Pepsi or Coke. And would this be like one of the acquisition targets for the giants, one of those two?

39:19Hari Ramachandra:I think there's a lot of buy and selling in these kind of businesses. I think there's a lot of like gin rummy played with these kind of businesses. And I think what they've done is they've taken Premier Protein, which is growing fast, and they've combined it together with Dymatize, which is like a protein powder type business, which is not a brand that I've heard of. And I kind of look at these brands a little bit. So, that's a red flag. And then they have this Power Bars. Like, I don't know if you – Power Bars were like the original protein bars way back in the day. And they've discontinued that in North America.

39:52Hari Ramachandra:I didn't realize that there's a legacy kind of brand now. The sales have still been growing. Sales have been growing pretty well for an extended period of time, pretty consistently pretty well. So I think they've put a good business together with a middling business and a bad business and then spun it off because that's the kind of shenanigans these guys like. They just like to do this stuff. They like to buy and sell the businesses. Then it had a pretty good run when it came out, probably because it was right on the heels of COVID. Everybody was trying to get fit and healthy again. And stock price ran from$20 in the spin to$80.

40:26Hari Ramachandra:Maybe that's just momentum, people just chasing momentum. But it was ahead of its valuation at$80, let's say. And I picked it up in December last year. I've paid$25 a share or something like that for it. So, it's$17. I'm down a little bit on that. It's down 30 % this year. So, since the start of the year, it's been a miserable run just watching it fall because it's the worst performing stock in my portfolio and it's down a lot every single day and it's kind of perplexing because I like the business and it's a very simple business. It's not a great business in the sense that the brand is, as you say, somebody could compete with it, but it's so small and it's so profitable that I think that an easier way is to sort of acquire this thing rather than to just try to compete directly with it.

41:13Hari Ramachandra:That would be the simplest thing to do, I think.

41:15Stig Brodersen:yeah i think for a pepsi or coke two plus billion dollar is not a big deal if they want to really

41:22Hari Ramachandra:acquire this brand the post holding still has a big holding in it so it has to be a negotiated sale so i would say that a negotiated sale happens a fair bit further north than where it is now but like still we're talking four billion dollars instead of two billion dollars plus a billion

41:36Tobias Carlisle:dollars in net debt so toby i i always like your picks and uh this is no different i certainly like the price. I think my concern is a bit on distribution. At least that's one of the concerns I want to raise. So three customers are 74 % of sales. So you have Walmart, same clubs, 34%. Then you have Costco and Amazon. And so I can't help but wonder why wouldn't Costco say, hey, we have Kirkland and it's cheaper and it has even more protein. I don't know anything about protein. But it's even better. And here you go, don't drink premium protein. So that would be my concern. And sort of like in continuation of that, are people asking for a protein drink, or do they ask for a premium protein?

42:27Tobias Carlisle:And if I can sort of extrapolate that, I would say, some people ask for a soft drink, but a lot of people ask for a Coca-Cola. And there's a reason why they ask for a Coca-Cola. So with that framework, I'm kind of curious to hear, how do you see that brand strength? Yeah.

42:43Hari Ramachandra:So I think that when you go looking for a high-protein, low-calorie, low-sugar drink, they're actually reasonably hard to find. A lot of them have a lot of sugar in them. And so I heard about this brand through social media. And then I sought out this brand particularly. And I've bought it in California and I've bought it in Florida when I was traveling. I found it in a few different places when I was traveling. because I didn't want to eat junk food. I just wanted to eat, drink something really quickly and keep going. And I think that that's the sort of the use case for this stuff when you're out and about and you don't have what you need.

43:19Hari Ramachandra:So I am personally looking for the brand when I go in because it's the search risk that you have, the search time. You don't have a lot of time. There's a whole lot of brands there. You're looking for the one that you know fulfills the requirements that you need. It's not hard to recreate that simple to do. So it would be not hard, but also not trivial to create brand awareness around a new one, but easy for one of those bigger brands. As I say, the business isn't great. The business is not a deep moat. It's a thin moat, but there is a little bit of a moat there. There's a little bit of brand awareness.

43:57Hari Ramachandra:And I think for the valuation, it's just all that risk is already embedded in the discount that you're getting from that valuation. So I think it's like$40, like 11 % free cash flow. They're using a lot of it to buy back stock pretty consistently at these levels. I just think that I acknowledge that it's an imperfect moat, but it's so cheap that I think that all of that is already counted in the discount.

44:25Tobias Carlisle:So as often is the case with very attractive priced companies, there is a reason for it. And I think you're right, Toby. I think it's factored in. But I think I would probably be a bit concerned about the coverage ratio. Right now, they're buying back a lot of shares, and then that's great. Should they be paying off debt instead? Have a bit more than a billion dollar in debt, which is a lot for such a small company. Average rate, just a bit more than 7%. Have a Moody's rating of B1, if one is so inclined to look that up. Perhaps we can talk a bit more about that later. And so I like it. I like it because it's so capital-like.

45:07Tobias Carlisle:You know, they build up this brand. That was also why I wanted to ask about the brand strength and zero point. They've outsourced manufacturing. And so like, yes, the return on investor capital is absolutely amazing. It also looks a little vulnerable. And I think, I guess it also comes down to how much of this is people are going to continue to focus a lot on protein? Or is it going back to quote unquote normal, whatever normal is? Because this is not a niche bodybuilding something product. This is like a mainstream product, but it wasn't mainstream before everyone wanted to talk about protein.

45:48Tobias Carlisle:And so I guess that would be my question to you, being the fitness guru here in the group, Toby. No, I'm just kidding. How much is this a secular trend into protein? and the focus on that and how much is this a trend that's going back to normal?

46:07Hari Ramachandra:So the focus on protein is, that's been around for decades in the bodybuilding community. The bodybuilders know that you get three macros, fat, carbohydrate, protein. You need this amount of protein for this amount of body weight. You need to get that every day. If you do that, life is easy. If you don't, you're hungry all the time and you can't put on muscle. that knowledge has seeped into the public consciousness more recently i don't know how long but like maybe the last 10 years or something like that and it's more of a focus now like you walk through the supermarket everything's got a bit of protein packed into it because everybody's kind of and it's the cpg firms you know that's the expensive part so they've kept it out so they could sell you at bigger margins and now everybody's sort of looking for it they've found a way to artificially stick it back into a whole lot of stuff so it's not ideal but milk is a good source of you know protein for humans and this is good for you so i from that perspective i think that the focus on the glp ones the fact that people are using these more and more i think that that indicates that people are there is a desire to get fit like no kidding everybody has that desire and if there's an easy way of doing it hit the glp ones and then you can't eat as much so the next stage after that is you know get your protein first i think people sort of i think there's a broader understanding that that's the way that you do it so i think that it's around for a long time as a category is this brand around i don't know but you know the nature of this stuff is that they'll come up with something they do keep on coming up with something better they'll say oh this has got more protein and less sugar that's some no doubt that and tastes better you know more attractive branding, whatever.

47:50Hari Ramachandra:So that risk exists. But these guys are spending money on that stuff too. They're trying to compete and iterate as much as they can, new flavors or whatever the case may be. And they do have the distribution. So distribution is hard. They've got the manufacturing and they've got the distribution. I don't know how big the category can get to, but it's capped probably. It's not going to be huge. And so there's a finite amount of this production around and they've got the manufacturing, they've got the distribution, and they do have a brand. So they're the category leader and they're sort of out there in front.

48:21Hari Ramachandra:It's theirs to lose.

48:23Stig Brodersen:Yeah. Thank you for that context, Toby. One question I had was, why such a significant drop? And I was trying to look for reasons when I was looking at this pick. It's like, okay, is it tariffs? Is it a risk? You said most of its production is outsourced. Is it outsourced outside US? is that one of the reasons the CEO retiring is that the reason I'm trying to come up with a reason why the drop and I'm not really able to put my thumb on any specific problem for

48:55Hari Ramachandra:this significant drop I think I looked at it too and I couldn't I couldn't find what the catalytic moment for it was I've been saying this for a while I just think there's this rolling speculative mania in the market that moves from you know crypto to meme stocks to nfts to precious metals and for a little while it was in this thing at 80 bucks it was too expensive it was two times what i think it was worth it was worth about 40 and at$17, it's too cheap. I still think it's worth, you know, well, at$80, it was worth$35. At$17, I think it's worth$40. So I think that it's the valuation got ahead of it and then the same behavior that makes it run up well past what it's worth, makes it run down well past what it's worth and that's totally normal behavior in the market.

49:51Hari Ramachandra:Very common for stocks to go up three times or down to one third of where they were over the course of 12 months. I think that's like the average move. in the business. So I just try to pick them off when they get low like this and try to avoid them when they're high. And I like the risk reward at this level in this stock.

50:09Tobias Carlisle:Preston Pysh, Ph.D.: Fantastic. Thank you, as always, Toby. And to Harrah's point, I don't know how you do it, Toby. You'll find these small gems and they're always really, really attractive valuations. Let's take a quick break and hear from today's sponsors.

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53:42Tobias Carlisle:All right, back to the show. Hari, I'm very curious about your pick. Very high quality company.

53:50Stig Brodersen:Yeah, my pick is Moody. It's along the lines of Berkshire. In fact, Berkshire has Moody in its portfolio. And this has been something that all of us who are followers of Buffett, Berkshire, we have been looking at this business, but always felt like, okay, this is perfectly priced. There is no discount available for us to own this. For those of you who are not familiar about Moody's, it's a rating, credit rating agency. A simple mental model I have of Moody is like a toll bridge business. So if anybody in the world, whether it's corporations, governments, or banks, when they issue a bond, they essentially have to pay one of the credit rating agencies in order for them to issue their bonds because many of the pension funds or other financial institutions are required to have a rating from one of these approved agencies in order for them to buy the bonds.

55:03Stig Brodersen:So they are called as NRSRO status. And only few have them. In fact, I believe between Moody and S &P together, they control 80 % of the global market, not just US market. So Moody as a business has two broad streams of revenue. One is the one that I just talked about, investor services, which is basically credit ratings. They rate everything from AAA to junk, and between them and S &P, they control 80 % of the business. 55 % to 60 % of Moody's revenue comes from this line of business. The other one is their analytics business. It's more like a subscription based SaaS style business, basically selling risk models, KYC tools, credit research, and data to banks and insurers, insurance companies and corporations.

56:02Stig Brodersen:It's a recurring revenue. It has a very high retention rate because it provides a lot of value. And that's around 40 % to 45 % of their revenue. And in terms of their mode, I think one is the regulatory mode because they're one of Of the few, NRSRO has been there for over 100 years, over a century. They're well recognized and everybody just go use their service. The issuer pays for their service, for the credit ratings. When somebody like US government or corporations like Google's recent 80 or$100 billion bond offerings, when they're talking in billions, for them, the rating agency fee is not that significant.

56:49Stig Brodersen:That's why Moody can command a 51 % operating margin. And at the same time, it is capital light. And it also has not just US, but across the world. So its revenue is split 50-50, which gives its diversification. but recently there are a lot of concerns about the business because of the one is because of AI the other one is recently SNP had some issues that that was specific to their mobility spinoff but still as Toby was mentioning like you know there is this wave of momentum driven mindset that is going through the stock so Moody was also impacted significantly I think both AI's fear and then the recent S &P guidance issues, weak guidance by S &P, together, the stock is down 22 % from the beginning of the year.

57:46Stig Brodersen:And the AI fears are not completely unformed because especially for their analytics business, if a lot of companies are able to automate, use AI, they can do some of this analytics part of these services that Moody offers by themselves. So I'm not worried about their investor services or credit rating business because that is legally bound unless there is regulation risk where we have liberalization in the regulation, which probability is very low. So 60 % of the revenue is pretty safe. The margins are pretty safe there. But the analytics part of their business, which is 40 % of their revenue, can face headwinds in terms of pricing power because of the use of AI.

58:35Stig Brodersen:They can definitely leverage AI themselves with all the institutional knowledge, information, sorts of records that they have. But still, it is a risk we should acknowledge for their analytics business. So that's why the stock is down. Now, just a quick overview of the business in terms of financials, their adjusted EPS for end of 2025 was around$14.50. That is around 17 % up year over year. Their Q4 EPS 2025 is expected to be around$3.46, which is going to be up 32 % year over year. Their operating margin, as I mentioned, overall for the business is 51%. I'm pretty sure their credit rating business is much higher in terms of their operating margins.

59:28Stig Brodersen:Free cash flow of$2.5 billion. They return a lot of their value through buybacks and dividends. They have been raising their dividend for 25 consecutive years. Their historic P has been around 35 always. now it is 34 because after this drop so in fact i think last year right now even this year they have around 4 billion new authorization for buybacks which is around 85 percent of their free cash flow because they have the luxury of not having to invest too much but with ai that might change they might have to adapt to ai so we'll have to see and the risks if i have to see the risks in the long term is, as I said, regulatory reforms that might take away that requirement for credit rating agencies.

1:00:24Stig Brodersen:The debt issue and cyclicality is also a risk because if the bond volumes go down, which I don't think is happening anytime in the near future, but that's a core edge risk as well. The third risk I see is they have been fortunate to be having a rich valuation, 35 PE all the time, as with AI and other things, if the market decides that that's too high, then we have a valuation risk, basically. That might happen in the medium term to near term. So for me, why am I looking into it is because of their... This is one of the stocks I have been following for a long term, and it is experiencing a short downgrade or sell-off for various reasons.

1:01:13Stig Brodersen:EI, I don't think is as disruptive as the market is making out to be for them. So my bull case is like, you know, the management is projecting anywhere between, say, 11 % to 14 % as their kind of, you know, compounded EPS growth in the next three to five years. That's the base case. if they continue at around 12%, we are looking at around$26 EPS by 2030. And even if the PE continues to fall and it's not at 34, let's say 28 PE instead of 34, so even if we bake that in, it is still a 70 % upside from here, which is around 11 % annualized. And the bull case is that if the PE remains the same, like around 34, not even going back to 35, between 30 to 34, then we are looking at an upside of around 100%, like 16 % annualized.

1:02:13Stig Brodersen:So that's kind of the upside. Downside is, okay, the PE compressors comes back to around 25. The growth multiple is not as good as we thought. Maybe it's below 10 % and all, but that's around 30 % upside here. So with the kind of business moody is and the more they have, like how you're pitching Berkshire's dig, I see minimum downside at this point, a great place to park the cash, even medium term to long term, and enjoy the dividends that they pay, I would put them in my tax deferred fund to avoid taxes on the dividend as well. That's the reason I picked this at this point of time. One is that there are some stocks that are being thrown along with the bathtub, whether it is Toby Speck or this one, because in general, there is waves going on through the market.

1:03:13Stig Brodersen:And these guys are falling, not just them, like Schwab is down. I was like, you know, S &P is down. So a lot of stocks are also down. JP Morgan Chase is down as well. So I was actually finding it hard to pick one. And then I said, okay, this is what I would go with at least. So that's my pick and look forward to your feedback.

1:03:35Tobias Carlisle:Trey Lockerbie I absolutely love your pick, Ari. I kind of feel like it's, I'm probably going to be too hard on Toby here, but I kind of feel like it's almost the opposite of Toby where I was like, I'm not really sure about the business, but I certainly like the valuation. And here with your pick, Ari, I'm like, I love the business, but the valuation, it's kind of like, it's terrible that you can't get the best of both worlds, but I guess capitalism is just that brutal. Amazing business, Hari. You outlined everything good about that business. And I think you mentioned 80 % just with Moody's and S &P Global.

1:04:12Tobias Carlisle:I think Fitch is around 15%. So you have Tropoli, really. And most would need both a Moody's and an S &P. It's more or less just a market standard. And it's kind of amazing the more you look into it. Moody's has been on my radar for, similar to you, I don't know how long, probably since I learned that Buffett invested in a long time ago. And it's such a good business. And also because you literally save money if you don't get a credit rating. There's definitely a yellow flag, if not a red flag. So you have to pay more in interest. And no one wants to do that. So even after you paid Moody's or S &P Global, you still save money.

1:04:57Tobias Carlisle:So it's not like whenever your wife is buying a designer bag and she saves, I don't know, a thousand bucks. It's like, oh my God, look at how much money you saved. You're literally saving money. So if you're paying them, I don't know, seven basis points, whatever, to get your rating, it's still a massive saving in terms of for you to go out and try to raise capital in the public markets without that rating. So very, very powerful. are probably not, to your point, not a lot of things to disrupt it. It would have to come from regulators where they have to go in and say, you can't do that anymore.

1:05:30Tobias Carlisle:Then I'm like, if that didn't happen after Great Financial Crisis, when is it going to happen? With all the criticism that was for good reason that you saw back then. So I don't really see that happening. You could theoretically say that, I don't know, the world's governments will go in and force everyone to use a domestic rating system, but you're also like, why would they do that? And also if they did that, and it's complicated then to attract foreign investors and provide that liquidity in the market. And so it seems like everyone would lose. And I don't think necessarily regulators would try to do that.

1:06:05Tobias Carlisle:I mean, they've tried to do it in some jurisdictions, but it hasn't really caught on. And I don't really know why anyone would necessarily want to pursue that. I think there are so many other things you could probably pursue in the financial section if you wanted to regulate it in any case. But if I have to find the hair in the soup, and I can certainly find some if I really try to look, private markets, you see a rise here in private markets. And again, I should say it's very small, but it's growing fast. The game you play there is just different because if it's private equity, that's say, extending private credit, then you would have a small group negotiating with one borrower and differing.

1:06:45Tobias Carlisle:They have their own team. So you don't need that credit rating because they would do that in-house. So it's sort of like if you had a, I don't know if this is the best metaphor, but if you're trying to sell a house and you're trying to sell it in public, you need a rating. But if it's like from one buyer to one seller, whatever price you can come up with sort of like works. So if we were to assume that private credit would just take off and public credit, not as much, there could be a risk there. But I'm trying to come up with a bear case. As you can tell I'm not doing a good job. So anyways, I'm too excited about this pick, even though not about the valuation.

1:07:20Tobias Carlisle:Toby?

1:07:21Hari Ramachandra:Yeah, I like Moody's as well. It's a great business in an oligopoly. Buffett's identified it. It's got great huge margins and so on. I think just to play devil's advocate, just to pick nits, just so there's somebody on the other side. I think the risks to Moody's are that it's a little bit more cyclical than it appears. It does depend a little bit on where the markets are when the markets are up a lot. Moody's does very well. There's a lot of issuance. So, they tend to be peak margins and peak multiple right at the very top of the market. And then as the market goes down and the issuance sort of dries up, then margins come in, revenues come in.

1:08:01Hari Ramachandra:And you can certainly see that in the revenue line that it's not that sort of tech growth path. It's much more cyclical. And then the margins are a little bit cyclical on top of that. But having said that, that's just how much it earns. That's not a risk to the business. It's purely evaluation risk. So you have to find some way of sort of normalizing for the margins, normalizing for the multiple. You have some risk to the 40 % of the business that's analytics. I don't know yet what AI can do in that. But you're right. It's like this sort of existential risk for it. It's not a direct risk just yet.

1:08:36Hari Ramachandra:And there's also the regulatory risk that if at some point the government gets upset with the way these guys are doing their ratings or there's enough lobbying so that some of the rating requirements are taken away, then that's the part of the business that's at risk. But I don't think that the likelihood of that is very high, but it's another existential risk. So business is great. Valuation is kind of the risk. I think the free cash flow yield is like 3.7%, which is a little bit south of the 10-year. 10-year is probably coming down. Moody's is probably growing over 5 to 10 years. I don't think the valuation is too far off here.

1:09:14Hari Ramachandra:So it's probably premium valuation for a premium business. What do you think that you earn at this level? What's your expected return, Harry, from where we are now?

1:09:24Stig Brodersen:Yeah, I think you both brought up very good points, Toby. I think there is definitely downside or risks. I think, especially in the regulation side, apart from the private market that Stig mentioned and what you said about the U.S. government, for example, having concerns about Moody, there is also a lot of movement from China of standing up their own credit rating agencies and creating competition. And as we head towards kind of a deglobalized world into fragments, will, say, Europe still consider Moody or will they go with their own? For example, the rating agency that they would approve in Europe.

1:10:08And if the world heads towards a fragmented rating agency situation, then definitely it will hit Moody.

1:10:16Stig Brodersen:So that's the other risk I think I should have highlighted. That is not a trivial risk for them. And I agree that it's a cyclical business as well, because the bond volumes is what dictates their revenues. In terms of my expected return, I think my base case is that the management is promising anywhere between 12 and 14. I would take the lower end of it. It's 11 % annualized EPS growth over a period of time. if I say like an 11, 12-ish annualized growth in EPS, and even if I put a less PE multiple than what it is today, just to kind of cover my downside, I'm looking at an annualized return of 11 % from this.

1:11:06Stig Brodersen:It's slightly above S &P. That's what I'm looking at. I'm not seeing it like a home run with this. It is definitely not something where, like the previous pick that you mentioned, where it's so suppressed that there can be a coil spring effect. I don't think that's the case here. It's marginally low. It's kind of 20 % lower. Even if I look at it just kind of coming back, mean reversion, whatnot, with the continued growth, I'm comfortable holding it for the five years. It's a safe bet. And getting 11 % to 12 % annualized return.

1:11:42Hari Ramachandra:It's interesting because the free cash flow yield is 3.13. And that's actually higher than it has been since August 22, July 22. But before then, it did trade at a higher free cash flow yield than that. So, it was sort of above four before 2021. 2015, it was six. And then if you go back sort of further than that, I don't want to cherry pick too much, but there were some higher peaks. the highest peak here was a 10 % free cash flow yield in 2011. So a lot of the return I think that's generated, when you look at the, like it's had a fantastic run, it's run from whatever, 20, 30 bucks to 420 bucks.

1:12:28Hari Ramachandra:A portion of that is the valuation has, it's three times more expensive, four times more expensive on a valuation basis since then. Still, it's grown very quickly over that entire period of time. So, I think that there's a lot of businesses like this in the market where they have been fantastic businesses, but the valuations have become really compressed. And I think if folks look back and see the rate of growth, they have to make that adjustment in their mind for the starting price for a lot of these. So, Microsoft, a lot of these names, Microsoft was 11 % free cash flow yield in 2011 too. So a lot of these businesses, there's nothing in the rulebook that says that even really good businesses don't go back to more long-run free cash flow yields.

1:13:14Hari Ramachandra:It used to be that the old rule of thumb would be you don't want a free cash flow yield much north of the 10-year or much below the 10-year. You want to get the 10-year as a starting point plus some growth. There's your margin of safety and so on. And yeah, so the valuation is the only thing that gives me pause, but the underlying business is great. I think the risk is just that if your holding period is long enough, three to five years, you just don't get enough return. Like that's the risk. It's not like you're wiped out or anything like that. You just get, you know, maybe the valuation goes from three to 6 % free cash flow yield and you get the growth as well.

1:13:50Hari Ramachandra:So you get a little bit of valuation headwind and the returns are a little bit north of a 10-year through that period because of the growth. But a great business.

1:14:01Stig Brodersen:Yeah, but very good point actually, Toby. I think in fact for Moody, if I have to kind of pick one risk, it's actually the valuation risk, which is the most critical one because it's 34. I mean, it's priced like a max seven stock. So for a business that is just credit rating, maybe it's because of Buffett stick that a lot of people kind of attribute all the good qualities to this business so that they're not willing to let go of the valuation, even if the business is not growing as fast as say any of the Mac 7. So that's a very interesting point, Obi, which we should definitely consider.

1:14:43Tobias Carlisle:Trey Lockerbie So, Hari, I already said how much I liked your pick, so I probably shouldn't continue doing so. But I think to your point about the valuation, I've been in financial markets for I don't know how long, and we've done these episodes for more than a decade together. It continues to surprise me how long high-quality companies can continue to compound. And you're seeing this, and it paints me as a value investor or a so-called value investor to say this, and they're priced at 30 times plus price to earnings. And then they just continue to give you double details returns. And it's so difficult for, at least for me, to invest in those companies, because they always look expensive.

1:15:29Tobias Carlisle:But the best companies, they just tend to always look expensive and they still outperform. And it's so painful. I completely agree with you in terms of the AI threat. I think it's probably overblown for their analytics part. The rating part, it's just so strong, and I don't see that getting disrupted anytime soon. So it's definitely not where you're going to make the greatest returns, but perhaps we are also in a market where you want to protect your downside even more than you always want to do. Just a few fun facts is one is so inclined. The CEO pay of Moody's, 16 million versus 25 million for Berkshire Hathaway.

1:16:07Tobias Carlisle:And Berkshire is more than 10 times as big in terms of market cap. And then, of course, this is also a snapshot. They would say 94 % is equity-based. Keep in mind, though, that the whole thing about being equity-based and how it's based on performance, for a company like Moody's, it's difficult not to get paid in equities, even if you do a terrible job. I think I can say that without offending the CEO too much. So anyways, another fun fact here with Bellring, market cap$2 billion, CO pay$6.5 million. I can't help myself. That was all I had to say about Moody's.

1:16:41Hari Ramachandra:I just want to talk a little bit about the valuation. I agree with you that it has been, particularly for a deep value investor, it's been a frustrating period of time that high valuations have tended to get higher. I don't quibble much with the way that the companies are sorted in the market. I do think that the Mag 7 are probably the best seven businesses in the market. And I don't think that Bell Ring Brands deserves much more than a$4 billion valuation. I'm not out of my mind in the sense that I dispute the rank. I just dispute the multiples applied to these things. I do think they're a little bit too expensive.

1:17:18Hari Ramachandra:And I just think that's what happens in some of these markets that if you don't get a shakeout, the valuation just keeps on getting increasingly stretched. I've been putting these charts on Twitter for an extended period of time, but just observing the one really simple way to think about it is the equal weight version of the S &P 500 versus the market capitalization weighted float adjusted. The S &P 500, the SPY ETF, the index is market capitalization weighted float adjusted, which means that the bigger market caps with more float occupy a bigger part of the index. all else being equal. That means that the S &P 500 is essentially a momentum investor in the biggest companies.

1:18:03Hari Ramachandra:And that's why the S &P 500 has done so well since 2015, particularly in relation to everything else. The equal weight version just puts the same amount into the smallest business as it does into the biggest business. And so, it's more of a proxy for small. It's more of a proxy for value. And it's a little bit of a proxy for cyclicals because they tend to be in the smaller part of the business. Over the very long run, over the 100 or so years of data that we have, equal weight has massively outperformed market capitalization weight because small tends to outperform large, value tends to outperform growth and so on.

1:18:38Hari Ramachandra:If you look over that period of time, even though equal weight has outperformed market capitalization weight, there are many periods of time where you can see for extended periods of time, 10 or 15 years where market capitalization weight outperforms equal weight. And it's always around these technological transitions in the market. So you can see it in the 70s with the nifty 50, same idea, the very best businesses. And why buy the other 500, just buy the 50, just hold onto them, pay any price, don't worry about it, it'll all work out. Then you look at the dot-com 1.0 that stands out. If you don't have this sort of global reach, you're not going to be able to make it if you're not on the internet, if you're not in cyberspace, you're not going to be able to make it.

1:19:22Hari Ramachandra:And then again, now, I don't know what you would call this internet 2.0 sort of become AI at the end of this long boom. But since Q3 last year, there's been this pretty significant turn, I think, in the markets that I haven't heard a lot of people talking about, but it has been small has started outperforming large value, started outperforming growth. Equal weight is now outperforming market capitalization weight. You can think of it like the S &P 100, which is the biggest 100, now outperforms the 500. Mag 7 underperformed the S &P 500 last year. I think that these things are going to start happening.

1:19:59Hari Ramachandra:That's the ordinary course. That's what usually happens in the markets. And it's unusual because people have been conditioned by what's happened over the last 10 or 15 years to think that the other way around is the way that it works, which is why you look at those stocks and you say, gee, they're expensive and now they're much more expensive, but gee, the stock's up so much because they've caught the earnings growth on the way through there. That could easily reverse and we could go back much more to a market that's one that I like much more, one that is much more like the long run average, in which case valuation does become more important.

1:20:31Hari Ramachandra:And business quality, if you look from 2000 to 2015, very good businesses, is Microsoft, Walmart. They traded sideways for 15 years. There was nothing wrong with the underlying businesses. They continued to do what they had done before 2000. And after 2015, it was purely a valuation coming back into line, and it could easily happen again.

1:20:51Stig Brodersen:Yeah, that's a very good point about the valuation swings. And I guess some of the barometers of the mood of the market is like Bitcoin is also down now almost 50%. that is tracking some of the more speculative tech stocks. So they all kind of are going down. And it's interesting to see that some of these companies like Moody's are still holding up their valuation. I don't know when their turn will come. So that's the risk to me because we don't know. It's almost like every group of stock is being taken in a group and then fired at in terms of valuation. And we don't know which group is the next.

1:21:31Hari Ramachandra:It's been funny to watch this rolling mania that sort of rolled through lumber stocks, rolled through its precious metals. Like a month ago, it was gold and silver going crazy. Before then, it was Mag7. Before that, it was the NFTs and crypto. It feels like it's been going on for a long time without any... Like it's never... There's never been a systemic crash. There's been like a specific crash for the mania. but at no point have we had the clearing of all the decks and restart all right jans thank you so

1:22:04Tobias Carlisle:much uh as always hari any concluding remarks here about moody's before we round off the episode

1:22:10Stig Brodersen:no i think this is a great discussion thank you for the perspective and i think for me the key takeaway is the valuation risk yeah it has gone down a significant amount right now but what's next. We don't know whether Moody will be in one of those groups, which will be taken to the woodshed in terms of valuation. So thank you. That was helpful. Yeah.

1:22:35Tobias Carlisle:I love that you say that, Hari. I also love, Toby, whenever you're talking about it, it's not written anywhere that it's supposed to be these lofty valuations for such a high quality company. With all of that being said, Jens, I want to give you the opportunity to give a handoff to whatever you want to give a handoff to. Toby.

1:22:53Hari Ramachandra:Yeah, I run Acquirer's Funds. We have two ETFs that trade US domestic deep value names, ZIG, which is 30 names in mid cap and large cap, and deep, which is 100 names in small and micro. It has a very distinct bet on in the market, which is that small micro value, reasonable business quality, turns around, and mid cap. I think mid cap is this sort of undiscovered part of the market, which gives you the earnings growth of small with the volatility of large. So it tends to have quite a good mix, better quality management and better valuations for the most part. And I have a website, acquirersmultiple.com, which has free stock picks on it like we've been discussing here today.

1:23:33Stig Brodersen:Yeah, great to be with you guys today. You can find me on Twitter. Hari Rama is my handle. Happy to continue the conversations over there. Thank you.

1:23:42Tobias Carlisle:Thank you, Hari. Thank you so much for your time, Jens. As always, it's a privilege.

1:23:47Hari Ramachandra:Thanks, Stig. Thanks, Harry. Always great. Thank you, guys.

1:23:50Tobias Carlisle:Thanks for listening to TIP.

1:23:52Stig Brodersen:Follow We Study Billionaires on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice. The content is impersonal and does not consider your objectives, financial situation or needs. Investing involves risk, including possible loss of principle and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product.

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1:24:44Tobias Carlisle:All rights reserved. Thank you.