TIP696: Mastermind Discussion Q1, 2025 w/ Stig Brodersen, Tobias Carlisle, and Shawn O'Malley
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You're listening to TIP. In today's mastermind discussion, I'm, as usual, joined by my friend, Tobias Carlisle. However, Hari couldn't make it for this quarter, so Toby and I tapped Sean O'Malley. If you like our mastermind discussions, you're going to love Sean's new show, the Intrinsic Value Podcast. It's basically a mastermind discussion every single week. In this episode, Sean is pitching AlterBeauty, and I think you'll quickly see how thoughtful he is.

My pick for this quarter is the serial acquirer, Livco, a company seemingly priced for perfection. And Toby is pitching VeriSign, a business that is just printing money. Before we jump into the episode, I want to let you know that I updated my portfolio and track record, and I made it publicly available. I started doing it last year, encouraged by my friend and co-host, Clay Fink, and I was surprised to see how many people have visited the page.

I'm frankly a little on the fence about making my portfolio public. Now, here at the Investors Podcast Network, we have a value of radical transparency. And for that reason, I do think that you should be able to see what I invest in.

But when you do, you'll also notice how few of the stocks from the mastermind discussions I invest in. And that is the entire point. I want to pitch stocks that I find intriguing for whatever reason. For example, today, I am, as mentioned, pitching Livco. It's a great company, but it's also on the expensive side. So it's not a company I'm currently buying into, but a company I have on my watch list. And that is what the mastermind discussions are all about.

We give each other feedback on stocks we own, but also what we have on our watch list. And as it should be, we invest in significantly fewer stocks than we talk about. Otherwise, we're just not picky enough about how we allocate capital. Now, another concern I have with disclosing my track record and portfolio is that it sometimes feels that I can't really win, and that's not aligned with how and why TIP was founded. So imagine that I display a track record that beats the market.

Some people would then mistakenly follow me into a stock because they looked at my track record and heard me on this show. And they mistakenly trust me so much that they don't do their own due diligence. But then on the other hand, also imagine that I'm not being in the market and people will loudly tell me that I don't know what I'm doing and that listening to our show is a waste of time. The very intention of our show is

is to educate our listeners to make their own decisions. Now, with all of those disclaimers, please find my track record and portfolio linked to in the show notes. And let's jump right into today's episode. ♪

Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Stig Brodersen. Stig Brodersen

Welcome to the MSS podcast. I'm your host, Dick Broderson. And today I'm here with Tobias Carlyle and Sean O'Malley. How are you today, Jens? Hey, Stick. Good to see you. Sean, good to see you. Yeah, good to see you. Happy to be here.

All right, so let's just jump right into the first pick here. And Toby, whenever I saw it, because we send emails to each other about our picks here before we go live, I was like, "That doesn't sound like Toby. It's such a high quality pick." So like, where's all the deep value? But whenever I saw it, I knew that Sean has done a deeper dive on that with our mastermind community. So I was like, "Hey, he's the guy."

to dial into this. So I hope you've done your homework, Toby. Sean's going to be tough on you.

Well, I'll tell you the, I don't necessarily buy things because they're super, super cheap. I just try to buy things that are like lower risk as rather than super cheapness. So I'm prepared to pay up a little bit when it's more certain. And this is the case with VeriSign, not Verizon, but the ticker is VRSN. It's an internet services company, critical internet infrastructure and domain name provider.

Folks may not have heard of it, but it does the domain name registration. It has a contract with ICANN, which is the international group that sort of governs the internet domains. And so it directs people to the computer that is associated with every single .com, .net, and so on. And they have a monopoly to do that for .com and these things. And they have a six-year contract contract

that renewed in November 2024, so they have another six years out to 2030. The amounts that they can charge are written in there. So, the main risk is always that somebody just doesn't renew their domain, but probably you guys are like me, you've got half a dozen to a dozen to 20 domain names that you just one day you'll do something with and you just pay money for them every single year. So, it's a very simple business and it's easy to predict where it's going to be in the future.

$20 billion market cap, $21 billion enterprise value. So they've got a little bit of net debt in there, but it tends to be quite cashy. And what they have done with that net debt is they've been serial repurchases of shares very consistently for the last five years. Five years ago, they had 107 million shares outstanding. Now they've got 96 million shares outstanding. They've been pretty good about buying them. I bought this for the Acquirers Fund, which is my mid-cap, large-cap fund in

In September last year, we paid $184 for it. It's trading at $210 now. So it's a little bit more expensive than when we bought it. But it's still sitting in my screen. It's still going to be in the portfolio. So we've rebalanced once. And if it stays where it is, we'll likely rebalance again and it remains in. I don't think that it's one of those companies that's really ever going to shoot the lights out as an investment. It's not a speculative huge upside, but it's just a pretty consistent little business that

Sales growth over the last five years has been a little bit north of 4%, which call that inflation, keeping up with inflation. But the EPS growth has been more like 10.7% because it's been such a good repurchaser of shares. And I think they're a little bit more focused on the sort of operational business aspects, balance sheet aspects. It was founded in 1995, continues to run to this day with this same sort of very simple business.

So that's really short and sweet. I sort of think that it's just a solid, easy business to understand. Earns pretty good returns on invested capital. It's got a call it a monopoly. You know, that monopoly is up for renewal every six years, but they have automatically, they have some automatic renewals provided they keep on doing what they're supposed to be doing.

So I think it's a simple business. The valuation, I think that this is a little bit more expensive than I would ordinarily pay for these businesses. But I just think for the certainty, and particularly when we picked it up 184, I thought it was just for the certainty of the business, it was worth... I don't think that the returns were huge, but I think that it could be like 10% compound pretty consistently for probably at least the next five or six years. So that's why I like it. It's worth taking a look at it.

Short and sweet. That's my pitch. All right, John, I know you had taken a look at it. So I'm going to come out here first and then I'm going to throw it over to you and hear your thoughts.

Yeah. Where to begin? For the record, I do like Verisign. And I think if you can get it at the right price, it is a really good pick. So I say that before I lay into you. No, I'll play nice. But yeah, like I said, I think at the right price, it is attractive and we're getting close to fair level, fair value for it. But it definitely has a lot of that certainty that you talk about that is very attractive. And what could be more certain than, we're talking about a bit before the call, but

The sales pitch is, there are, I think, 170 million websites in the world that end in .com or .net, and they all pay VeriSign implicitly $10.26 a year for the right to keep their website accessible. To be able to type in theinvestorspodcast.com, obviously, you're putting that in English, you do it in any language, and VeriSign plays a part in that infrastructure that converts that English text into

to, I guess, an IP address that's readable by a computer and then oversees the domain that makes sure you get to the right place.

when you type in that search. And so, like I said, that's just a very predictable business model. Most people want to keep their websites up and running. And for the bear case, this is ultimately pretty inconsequential, but one of the main things I've seen management talk a decent bit about is their revenue since 2019 from China have specifically fallen by about $40 million, which again is sort of a rounding error for VeriSign, but it's down from 120 to 80. And the reason I mentioned that is

not because those revenues matter a ton, but because it shows that website registrations don't just increase in a straight line and that there is some real cyclicality to it, basically. And with China, the reason for that fall off is they were hit particularly hard by pandemic and lockdowns and some of the economic weakness there. And like I said, there's this economic cyclicality to domain registrations when times are good and the economy's booming, everybody wants to start a website and sell their products and be an entrepreneur. And

When things aren't going as well, they don't want to pay $10 or $20 or whatever it is for a domain every year. And the other thing too is that the Chinese government put in some rules that basically make it harder to register and own domains there. And so again, you can have these various reasons for why domain registrations fall off. And structurally for VeriSign, those earnings are very predictable. But like we said, it's basically the number of domains registered in the world at indian.com times that

price that they can charge. And it's worth mentioning too, that this is sort of like a regulated monopoly. So they don't have their own pricing power, right? They can't... That 4% revenue growth you mentioned is basically over six years, for the last four years of a six-year period in that contract, they're allowed to raise prices by 7%. And then over six years, you didn't raise prices the first two years, the average comes out to be about 4%, which is exactly...

their revenue growth. But if you have those kind of declines in registrations, that can be a real headwind. And the other thing worth mentioning too is not only do they not have discretion over their own pricing, they also don't have control over their distribution. And if you're going to go out and buy a website domain, you got to go to GoDaddy.com.

The thing is, GoDaddy is incentivized to sell you, there's dozens or different, hundreds of different domain endings that you could purchase. A lot of them are higher margin than just .com. .com is all reliable, but it's boring and it's not that exciting for GoDaddy to try to sell. They don't really control the distribution. They don't have control over their pricing because they're a regulated monopoly. VeriSign wants to push people to

I was actually really shocked to see this, but .inc domains, if you want to have .inc at the end of your website, those are so prestigious that they can cost $1,000 a year. Compare that with the margins for selling .com domains for 15 or 20 bucks. And then you have .xyz, which is really popular with tech startups. And you can have anything from .web to .shop to .org, .net to .co to .com. So there's just all of these domains. So they have a monopoly over .com.

And the way I kind of think of it is like, you know, they have a gate on that toll road, but there's like a bunch of other toll roads right next to them that you could take. And some of those toll roads are more exciting and kind of fun to go on. And so, you know, to me, that's some of the really major concerns, like I said, the lack of distribution, all the different options for domains and the fact that on the margins, you know, there's, there seems to be a trend toward things like .xyz that are maybe more exciting and interesting. And

So I think I'll pause there because I guess I don't want to bash it too much, but the lack of pricing and distribution and the option for alternative domains is kind of the three key points that really stand out to me.

Well, I think it's a great point and I'm glad you raised it because I think it's an existential threat to the .com that there are so many and I've registered domains with GoDaddy all the time. I go through and I'm always like, there's a .club, there's any number of .ai, you know, all of these sexier sounding things. The funny thing is though that you very rarely actually see one of those out in the wild. You encounter the .com sort of almost exclusively, at least in my experience, like you're

Really, there are a few .nets like maybe, but mostly it's .com. And Paul Graham, who's the internet kind of website guru who VC, he says that if you're a startup and you can't get the .com, just pick a different name. You got the wrong name if you can't get the .com for the thing that you want. So I think it's considered pretty important. I think it's the thing that it would look a bit funny if you had the .xyz and you didn't have the .com. So I think that the

People do pick up those other things, but they always make sure they get the dot-com. How long that persists for in the future, I don't know. But I still think it's the, at least for many people who use the internet, the dot-com is kind of the gold standard. That's the Cadillac that everybody needs and then you can expand to everything else. But I think it's a great point and it's something that I've thought about too. I don't know if it impacts them in the next six years and I don't know if I'm necessarily looking to own this thing forever. I'm just looking at to the end of the next contract.

No, that's perfectly fair. And I think they kind of face the same question that Google faces and it's,

you know, how is chat GPT and AI summaries going to, at least longer term, how is that going to affect basically the internet and the number of websites that are being registered, right? Because, you know, if you can, I see this all the time, I'll put in a search and then I get the answer from the AI summary on Google at the top. And then I don't even need to go to a website. So even if my number of Google searches hasn't declined, my number of website visits has. And that's sort of like the underlying health of the domain,

ecosystem. And so if people aren't going to websites as much because they're getting these AI summaries, again, to me, intermediate to long-term, that's a bigger concern. And then related to that, from the business perspective, there's a ton of operating leverage, right? This is a business with 56% free cashflow margins, which is massive. I think they're the fifth most profitable company in the S&P 500 tied with Nvidia. And I know that a couple months ago, I was going through Joel Greenblatt's

lectures at Columbia that are on YouTube. And I think he said his biggest investing mistake ever was buying this company that he had incredible operating leverage, but operating leverage goes both ways. Right? Right. Yeah. And any kind of decline in sales growth, incrementally margins are falling too. So you get hit by this double whammy for free cash flows where it's like, not only is revenue coming down, but also profitability is coming down. And so that's what really scares me with VeriSign. If domain registrations even stay flat at 170 million,

With the share buybacks and with the 4% average price increases every six years, I can see how you get a pretty attractive return. But yeah, I don't know. That's my two cents. It's kind of like an engineered return. It's not organic. There's a lot of... But I don't mind getting it that way. I'll take it how I can get it.

Yeah, it's an interesting pick. And it's a bit like, whenever I saw it, I thought, oh, it's just like utilities. It's not a way to become rich. Perhaps it's a way to stay rich. I think I probably have a hard time seeing .com going away. But I also looked at the ChatGPT angle. I find myself increasingly use ChatGPT instead of Chrome. It's not because I think I'm the average of the world or anything like that, but like

In that case, you don't really go into the websites in the first place. To your point, John, even if you're using Chrome, you don't really see that. So I don't know. People also said that about the app economy, that you stay on the apps. Who knows? But it's probably not a rapidly growing business. And perhaps those multiples, perhaps it's a bit more like a bond to some extent. I'm not really sure how to look at the regulated monopoly.

you know, it sounds good that they can hike the price, you know, call it 7% over the last four of those six years. I don't know the contract in detail, but what if we enter a high inflation environment? I don't think I'm going to bring anything new to the party whenever I say that. I mean, because you can see that in the bond markets right now. The market is pricing in a higher inflation environment. We're probably going to be looking at more expensive supply chains.

What does that mean in terms of, if you can hike prices by 7%, that's probably fine if inflation is 2%. What if it's not? I don't know what that is. And then there's the other discussion about, and obviously this would almost be like speculation, and perhaps people don't really pay attention to how much they go up, but what kind of climate are we looking into where you're looking at someone like Verisign that makes so much money and they're still allowed to raise...

prices, like with any kind of public backlash to that, I don't know. You look at the CPI numbers and it's one of those where we want to say it reflects the cost of living,

I'm probably increasingly looking at M2, even though some people say that it's not inflation and it can hit inflation. But I mean, you look at a number like CPI, which is most countries are very much linked to entitlements. You see a huge wave in the West of more entitlements and governments don't really have an incentive to let CPI numbers reflect a significantly higher cost of living. Stig Brodersen : Delicately put, Stig.

Yes. And I know we're not supposed to talk about macro whenever it's like we're talking about the micro level right now, right? But you're just looking at so much debt out there, and I'm probably super biased from rereading The Changing World Order right now, but there's some funky stuff going out there. And if you look at where the incentives are,

I don't know, 7% you can... And then to your point, John, it's lower because you can only do that four years. I don't really know. And then on multiple of, at the time recording, like 24. Can I ask, because I think it had .com and .net, how does it work with getting other domains? Is that even something you bid on? I guess if you can't bid on that, it's not like it's a secret business model and the world hasn't heard about. So it would probably also come at a very high cost. What are the rooms for growth, if any, for a company like this?

Outside of the sort of engineered growth, yeah. I don't know. They have the .web domain as well. Presumably, they could expand into those kind of adjacent toll roads that Sean was discussing earlier. I don't know. There's a question of what it costs them to do it. I think they're probably reasonably cost sensitive. They are sort of prevented from raising prices at $2

faster rate, there's still sort of, you know, $10 a year is just of all the expenses in my business, like I don't even notice the $10. You know, there are just so many more expenses that are so much bigger. I think that they've got a lot of room to rate, like they could charge me $100 a year and it would still be, it's probably still pretty good value at that level. So, it's regulated, but I do think that they've got room to negotiate higher. Yeah.

Well, what's interesting is that .com is the only domain that is really regulated. It's seen as being systemically important. And I think that's probably why they haven't ventured into acquiring other domains. I think they're kind of encouraged by the government to focus on the systemically important domain that they run and not bother with the other areas. But it is interesting too, and maybe somebody will fact check me on it, but

There is some wonky legal stuff too, where for a long time they were regulated by the Department of Commerce. And it was the Department of Commerce who set basically the price limits on how much they could hike the domain rates. And then that got transferred over to ICANN, which is this nonprofit group. And so they still have a contract with the Department of Commerce, but they also have a contract with ICANN. And apparently ICANN is now in charge of the price regulations for VeriSign now in the .com domain. And

Like I said, it gets kind of wonky and it's hard to know, but ICANN as a private organization, just to counter your point, Stig, they're probably not thinking of it through changing world order and government debt levels and thinking we need to raise taxes or not allow price hikes for VeriSign. Stig Brodersen : Actually, if you go to their website, their mission is much more free market oriented. And for the other domains that they kind of interact with, they don't have price restrictions in place. So they're

There's a lot of speculation, but that's kind of where I think about with VeriSign. If they were in their next contract period to not to have that clause removed where they can do pricing at their own discretion because they're not working with the government directly anymore, that would be really, really interesting. But I'm sure somebody who's familiar with the contracts and is a legal expert will tell me why everything I just said is wrong. Preston Pysh :

They could also do some acquisitions, but they haven't shown any appetite for acquisitions. They've done none for 15 plus years. So it seems unlikely.

Stig Brodersen : Yeah, but I think the way the management is incentivized, and so it's one of the regional co-founders that's now running it and also chair of the board. And the management now is incentivized with operating margins. So I don't know of any other, too many other companies that have a margin of what, 68 or something crazy like that. And it's probably something that's only going to go up because they don't have any incremental expenses and they can just hike the price. Stig Brodersen :

I don't know what kind of acquisition they could make to increase that operating margin. Obviously, he's in control. He could change that setup, but I don't know. The cash flows just looks to be very predictable. It looks like it's a good business at the right price. And I think to your point, Sean, I don't think they're at all that they're thinking about the changing world order and that framework and the macro environment in M2, but I think that's probably even...

worse if you're an investor, because what they would probably do is they would say, "These are the CPI numbers," and they're saying, "I don't know, 2%." And perhaps the pain that we're feeling as citizens is more 6% or 7%, but then they're saying, "No, it's a regulated monopoly, so we are putting a premium on that 2%." They can only do for five or six years. And so I can see a contraction, everything is equal because of the inflation point. So

I don't know. I think it's a great business at the right price. It's such a cliche. You can say that about any other business, but there you go nonetheless.

Yeah. The thing that worries me a little bit is there is this element, because I keep going back and forth with, like I said, that very predictable earnings, that is very attractive, and then some potential for some very dramatic upside if they are able to get better control over their pricing power. But then just look at CrowdStrike, right? All you need is one catastrophic technical failure to really derail your business. And the thing with VeriSign is for 25 years, they've run the .com domain and they've had 100%

uptime and I have no reason to think that they aren't great operators. But you have this existential risk where if there is some kind of major technical failure, their entire business revolves around .com. And so if there was some failure and the government or ICANN decided to look for a new domain registry operator to replace them because of it, because it was such an egregious mistake, then basically they lose 95% of their business overnight. So that's what kind of scares me. And

I'm not an IT expert. I have no way to validate how redundant and safe their systems are. And so then that just brings me back to the point, which maybe I'll ask you, Toby, why not just buy a corporate bond? If it's a corporate bond-like return, why not just get something that's even more guaranteed?

They've got some growth that the bond doesn't have. They're doing some buybacks so they can goose it a little bit. They've redirected most of their free cash flow to share repurchases, I think. It's a pretty simple business. Yeah, I think that I like the potential for upside more than with a corporate bond. There is some potential for some things that could go right for them. And if we go through some sort of volatility, they'll be in a position, they'll just get cheaper shares, they'll be buying back. I haven't

I have a bias towards companies that buy back stock, particularly when they've done it over an extended period of time as Verisign has, just because it gives them that opportunity to take advantage of weakness in the market where there are businesses where I get terrified about what's going to happen when they go through some periods of weaknesses because they just don't make any money and they become targets for take-unders and bankruptcy or whatever might happen. But with something like this,

it's going to be free cash flow positive through that entire period. They'll be buying back stock. They'll come out the other side. On a per share basis, they'll be worth more. So for those reasons, I think it's worth – I mean, as I said, I bought it at 184. It's at 210 in a pretty short period of time, which that's not a huge move. It's like 20% or something like that. But I thought at 184, it was screamingly good value. At 210, it's still pretty interesting, but it's not where it was when it was 184.

I think it's a great pick. Yeah. Anything else here, Sean, about Verisign before we jump to the next pick? I think the only thing I'd mention is we forgot to talk about it, but it's actually a Berkshire investment too. I think they bought it like 12 days in a row and they're now the largest shareholder in the company. So that's an important wrinkle not to overlook.

I did front run the boys. I would like to point out. I think it's the boys. I'm pretty sure it's not Buffett. It's one of the boys, but I got in there first. I didn't wet, but I was very happy to see that they bought some. Thanks for raising that. That's one of the key parts of my pitch.

All right, Jens. We should probably do disclaimers though. I don't necessarily think it's going to come as a big surprise for anyone, but we always talk about if we mention any kind of stock that where we are long and anyone who's listened to more than one episode of this podcast probably know that I'm long. Berkshire, I don't know. Tobias, actually, I don't think you're holding your fund, right? Berkshire? Berkshire, do you? No. No. And I don't hold anything outside of the fund either. The funds, two funds. I'm long Berkshire, yeah.

I don't know. I always feel a bit iffy about holding Berkshire because it's one of those where you're like, you just know you're not going to get the best return. But at the same time, perhaps it's a bit like holding Verisign where it's sort of like a bond almost, or at least like you feel very safe about it. And so it sort of like allows you to do some silly stuff perhaps because you know it's sort of like a cornerstone in your portfolio. Let's take a quick break and hear from today's sponsors.

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All right, back to the show. Stig Brodersen : All right. So speaking of silly stuff, I want to transition into my pick. The name of the company is Livco. It's a Swedish seal acquirers listed in Stockholm, and the market cap is roughly 13 billion. The Swedish stock market has been the second best performing in Yoruba over the past decade.

with a CAGR north of 10%. Unfortunately, it doesn't take as much in Europe to perform well compared to the S&P, but that's just the way it is. As we have seen in the US, there is an element of self-reinforcing effect here. The best companies, I should say this is the sweetest company, but generally the best companies want to list on the exchange to give them the best valuation. So even if you have a company that doesn't get the majority of the revenue,

let's say in the US, you could still list it in the New York Stock Exchange. Because if it's a hot stock, you can just raise more capitals on some markets compared to others. And then you have this effect where, oh, they perform really, really well. And then other would go there to raise and so on and so forth. And you even have a company like Apple, where the biggest market is the States, but they still have more revenue outside of the US

So it's kind of interesting. But that effect is, I should say, for obvious reasons, even more prevalent in the Nordics. There's this interesting stat here where among the Nordics 10 most valuable companies based on market cap, the median share of revenue generated at home is just 2%. And so it is one of those things where you're like, oh, do I need to know a lot about Sweden? No. They do have 11% of their other business in Sweden, but it is one of those things where you

you look at where is it listed, but then obviously you would have to dig deeper. So I want to talk about my pick. I don't own shares in LIVCO, I should say. And I will

now tell you why, but also why I still want to talk about it. So let's start with the latter. So Livco is a so-called serial acquirer. And so the bread and butter of that type of company is to buy companies. And you can sort of like say that the raw material is free cash flows. They have three segments, dental as one, demolition tools, another, and then they have something called system solutions, which is a bit like a catchphrase.

all. Even that is actually divided into five different segments where even one more of them is a catch-all. So you can just think about it as a serial acquirer if you want. Stig Brodersen : It was not born as such. There's a very rich story about the company. I won't drag you through all of it. You can even go back to 1903 if you really like. But for simplicity, I can say that the company was listed in 1998 and then taken private in 2000, relisted again in 2014. Stig Brodersen :

And in the roots, you can really think about it as an operating company that happened to realize that they couldn't grow organically with the rates they wanted to, so they had to acquire companies. They didn't even know they were called a zero-reacquired, they just bought other companies. So that's the way it is. But I think that idea of first and foremost being an operating company, it's very clear whenever you study the company more, because there is a very high emphasis on organic growth.

which is notoriously difficult for a serial acquirer. And I'm going to talk a bit more about that shortly. But really the growth of a serial acquirer, you can say comes two ways. It comes from acquisitions, obviously, and then also from the organic growth of those existing portfolio companies. And you obviously want the best possible organic growth, highest possible, but it's not that easy. At the right price,

probably want to buy a declining company. And so you could also say, "Well, now organic growth is declining, but yeah, but if you paid it theoretically P/E of one, it was probably worth it." Stig Brodersen : Now, almost all CEO acquirers, probably all CEO acquirers would tell you that they're only buying companies with a moat. Well, probably all stock investors say that too. And LIVCO is no different in their communication. So they

They would typically acquire 100% of the company, but they have in more recent years, especially since 2018, more board majority. And they realize that sometimes they can actually get more out of having a sliver of ownership with a new CEO or perhaps even the existing CEO that founded the company. Stig Brodersen : So I think it's important to also understand why that organic growth is

is so difficult. And it really goes back to this whole idea of how much should a company like Livco acquire? So let's say that you are looking at a company and they're growing organically, I don't know, 10%. So why wouldn't that continue? Well, many reasons why that wouldn't continue. Perhaps one of the reasons why they want to sell is because the founder who knows more about the business than anyone else realized that there's only so much growth left. That could be one.

Another is that a company like Livco typically buys another company because the founder wants to retire. And so as a CEO acquire, you need to find a CEO to replace that person. And hopefully you can find someone internally to step up, perhaps not. So you're really looking for someone with expert knowledge, which by definition is difficult because you want to buy a company in a niche.

So let's say it's a small company in Norway. Well, you're looking for a CEO that probably wants to bring his family with him. He has to want to live in that village or whatever that is. He has to like the compensation. He also has to be an expert, which by the way, we just talked about, he's in a very niche thing. And also he cannot be so good that he started his own thing because he was really an expert in that. Stig Brodersen :

you really have to check a lot of boxes, which is why this organic growth is very difficult. Oh, by the way, he also doesn't have a lot of equity, if any, compared to the founder who might have 100% of the equity. So it is difficult.

And obviously, there was a generic sample. Whenever I read through the latest filing, they just bought a small company that's an hour away from where I'm sitting right now. So it's a small company called ProDental, $2 million in revenue, 12 employees. But it's sort of like, if I can just put an anecdote to that, and I don't know anything about dental, I should say. It's a dental lab.

But we have a culture here where it's also kind of difficult if you don't speak the local language. And so that's another thing. So if you're buying a company, in this case in Denmark, not only would you have to check all the other boxes, but it's also going to be quite difficult for you if you don't speak Danish. And so that just limits the pool. And so whenever you look at a company like Levco that had an organic growth since 2014, when it got released of 8%, it's just a lot harder than it sounds. Stig Brodersen :

And then you can even add the business conditions probably being quite good just in general. So you probably can't expect that moving forward. But you're looking at something like 12% acquired growth, 8% organic growth. It's a bit like running a marathon in less than two hours and five minutes. It's something very few in the world can do. And it's hard to do once, and it's just really, really difficult to continue to perform at that level. Stig Brodersen :

So I wanted to talk a bit about competitive advantage. I don't really know what it is. So I'm going to talk about it, but then also go back to, I don't really know what it is. I think it's just very difficult for serial acquirers to identify what the competitive advantage is. And I want to use a metaphor from the world of the Investors Podcast Network really to illustrate my point.

So we are an educational show and we want to talk about investment process and different stocks to buy. And so it's very difficult to separate signal and noise whenever you listen to someone talking about stocks on a podcast. And one of the challenges that we face is that everyone who wants to be on the show as a guest, they all say the right thing. They say, buy a company with a strong balance sheet and make sure they have a mode and asymmetric bets and

Vengeance with integrity. They say all the right things. And they say that because it's true. It's not because they're dishonest or anything like that. Those are the things you're supposed to say. But the guy who has a 5% CAGR says the same thing as the guy who has a 20% CAGR.

And so how do you separate the signal from the noise? And so one of the ways we've done that here, because we get, I think just in my inbox alone, I get more than a thousand-ish requests to be on the show. And that's just my inbox. I don't know how many Sean gets and how many, I don't know. So we probably get at least a few thousand to be on our show. And so what we've done is that we sent them a link, because if you don't send them a link

They have a HubSpot thing that just keeps on pinging you until you put them in the spam folder. So it basically says, you can be a guest on the show. You just need an audited track record where you show that you've been beating the S&P 500 for more than a decade. If that's the case, you won't necessarily get on the show, but that means that you will go on to the next step. And so it's sort of like a way to filter signal from noise.

Stig Brodersen : I'm trying to use the same framework whenever it comes to serial acquirers. I think I've seen enough investor presentations and read enough financial reports to say that you really get the same song and the dance. They talk about, "This is a permanent home for a business. They are their preferred buyers. We have a decentralized structure." And then it goes out to some kind of smooshy conversation about, "We have a wonderful culture." And that's probably true.

But it also goes back to how should you think about this if all the CIO acquirers are saying the same thing? Because that is probably the mode for CIO acquirers. But if you look at the track record and LIVCO has an outstanding track record, then you can probably attribute that to what they're actually saying, which again, is the same as everyone else is saying, which to some extent is the same as Buffett has been saying during his YOLO meetings.

And this is tricky. Lyft has a market cap of $13 billion. It's a massive company now, or well, depending on how you look at it, depending on what kind of company you compare it to. But if you have like 10 million or 8 million whatnot in EBIT, going to 20 million for your sale to acquire is sort of like a simple thing. One guy can still do it. You just buy more companies. But then at scale, it becomes much harder. You need to

find a way to operate at scale. You need to find a way to manage that deal flow. You really have to design an organization. And it seems like Livco figured out there are only three people in the headquarter, the CEO, the CFO, and then the head of systems solutions. And so to talk a bit more about the system, which is one of those things that probably are easy to show in an Excel sheet, but it's just very difficult to execute on. So you have a system where

they have like 200 odd different companies, and they report to a so-called group manager

So they have 14-ish people in the organization who have the responsibility of a group manager, which is to be chairman of the boards of the portfolio companies and also look for new acquisitions. And it's a tricky situation. And you can sort of like look at it as many small lift codes in the lift code system if you want to. To become a group manager, you need at least a decade worth of experience, typically as the CEO, and at least in two of the portfolio companies. So you're sort of like...

create that dynamic between you as a chairman, but also the CEO that you're guiding. LiveCo, as they've grown, have become increasingly sector agnostic. Now, for example, for the dental segment, it's still dental, but it's up and down the value chain. So it's software, equipment, blah, blah. They're going broad. And the other thing is also that if you only want to grow in dental, because you need to be financially disciplined,

you either end up buying very little or buying a lot and then overpaying. So they put a strong emphasis on the fact that everyone can buy a business and it's not hard to buy a business. You just have to pay the most. You just have to pay the most. And that's obviously not what you want to happen. But then, of course, you also lose out on some of that vital industry knowledge the more you branch out. So it's like striking that balance is tricky. Stig Brodersen : I found this structure quite interesting for the group managers. I spoke with an analyst covering the stock here. The other

the other day and he said to me that the group managers were paid really well as in more than a CEO in the midsize Swedish company well. Stig Brodersen :

And I think that's an important fact. And it's an important fact for a few different reasons. One of them is that the key, it looks like for LIVCO, is to have that talent pool. Obviously, you want that talent pool for the portfolio companies, but you really want it on the group manager level, because those are the ones who are chairmen of the different boards and find and incentivize the CEOs of the portfolio companies. And so they're paid really well. And they also...

at least for the right personality, they might have a better job than being a CEO of a midsize company where you have to communicate with stakeholders and you're in the limelight, and perhaps they just don't want that. So it's also about finding that match. And again, I'm looking at track record, which is, and it seems like they have been finding those group managers. Now,

Only the three in the HQ are registered as insiders, so they're the only executives. So those are the only way you can see what they're trading. Can't see that with group managers. I haven't been able to validate how they are specifically incentivized. Now, you know the broader thing was, for example, on the portfolio level, you are incentivized on the free cash flow conversion, which is very, very good, is above 100%. And on the

organic EBITDA growth, whereas for the group managers, it's also EBITDA growth, but also return on capital employed. But it's not disclosed that they are required to, like Constellation Software, required to invest so and so much money into stocks in the open market. But they have disclosed though that they have synthetic stock options program, which means that they don't issue more shares, but it works as such because it's backed by the holding company shares.

And you can see after they've been relisted, there haven't been more shares outstanding. So it's without diluting the existing shareholders, but it's set up in a way where you get the best of both worlds. Stig Brodersen : So I think if you talk about the competitive advantage, it's a well-oiled machine, which is probably best illustrated whenever you saw the previous CEO step out a few years ago due to a spat that he had with Chairman of the Board, also a majority owner, I should say, called Bennett.

And the business chucked along very well after that. And the new CEO and the current CEO, he's gone through those steps I just mentioned before. So that's a good testament to the strength of the organization. Stig Brodersen : I still have a segment here about the risks and I have one about valuation. But before we get to that, because I kind of feel I've been droning on, I want to throw it back over to the group here and we can go on from there.

Yeah. I mean, I think it's an interesting pitch and it reminds me of Technion, which is a company I know you've covered a lot and we've talked about before, but I guess my first thought goes to, if you're doing this playbook where you're a publicly traded company and you're trying to acquire mostly private businesses, it seems like you're really, and maybe this is more an issue in the US, but you're going toe to toe with private equity funds and their AUM has ballooned massively over the years. And then also you're kind of competing with private credit too, because

Maybe they have just more financing options than they otherwise would have because so much money has been drawn into the private asset space. And then at the same time, you have a set of circumstances where you're trying to buy from owner operators and small businesses. And I get the whole relationship thing, but at the same time too, if you're trying to get somebody to part with their life's work, it seems like at best you have to pay them a fair price or probably some sort of premium. And so just between that,

dynamic of obviously how much you pay for those businesses. And then also, on the one hand, there's the competition in terms of the underlying businesses actually compete with. And then there's the holding company level, there's the competition with private equity and private credit to a different extent. And so I guess I'm kind of rambling there and that's two different points, but the question really is, how do you reconcile that? And what do you make of that increased competition for bidding on those companies and how that affects the price paid for those businesses? Robert Leonard

Stig Brodersen : Yeah, I think that's a great question. And it is a real problem. If I can just talk about competition, the former CEO, he started another competing company after he was let go. So I think you bring up a great point. There are a few redeeming factors, but it doesn't change the fundamental fact of competition and the issues about competition. One of them is that, and now we're going back to the whole smooshy culture thing.

there is something to be said about from one entrepreneur to another. It might be so that if you want to sell your company, you just want the highest price. It's not always the case for everyone, especially not if it's because you are retiring. And having encountered private equity funds, I don't know how many people are going to offend who works in private equity who are listening to this. You get a different feel whenever you speak with private equity. Stig Brodersen :

So we here on TAP, we get a number of requests from private equity to be acquired. And it's usually like a new MBA, mid-20s, someone who is compiling a list of different targets and are fishing for different information. And it's set up almost like a, here are so and so many different companies that have showed so much result.

Let me just send something out and let's see what happens. It just feels bad. It doesn't feel good because you feel like you're speaking with a faceless voice.

terrible organization. Whereas if you run an organization like Livco, and keep in mind, the person you're speaking to has been a CEO of these two successful companies, otherwise you wouldn't be promoted into that position. It's a different conversation. There's a different type of respect. You speak from one entrepreneur to another.

which is different. And so I think that's one thing I wanted to highlight. The other thing I wanted to say is that that financial discipline is very difficult to have. Like, ugh, you're going back to the culture again. But it's tricky. So for example, whenever the interest rate was zero, you had a lot of private equity going into the space, and you had a lot of people who were incentivized the wrong way. And so for example, someone in private equity, they're typically incentivized

to buy at the wrong time and sell at the wrong time because of the interest rate. And also because they're raising new funds, and they can only raise new funds if they're applied, say, 85% in that current fund before they can raise a new. And so you have a lot of incentives where a company like Lyfco can say, "Look, what we're really looking for is to make more money." You don't get any rewards from an increase in top line. You don't get any rewards for acquiring companies. It's really about organic growth and return on invested capital. And so whenever

Whenever you think about that, I do think that there are some redeeming parts to what you said about the increase in competition. Then at the same time, your criticism is 100% solid. It seems like everyone and their mother these days wants to start a silverware acquire or invest in one and whatnot. And so it's a tricky business model because it seems so easy to do. And it's one of those things where

probably, I don't know, most people probably wouldn't like to do that, but it sounds cool to a lot of people, right? Like, oh, you're going to be the guy, and then you're going to walk into a room with millions of dollars and buy, sell, buy, sell. Obviously, the reality is different, but it sounds good, and it attracts a lot of people who want to do that. If I can continue a bit about the risk, if I can try to

to tell you why you shouldn't invest in LIVCO and also why I haven't invested in LIVCO myself is that everyone loves the company and it's for good reason. Stig Brodersen :

there's a huge risk of buying too expensive as an investor. That's also why we're putting a stock on our watch list and perhaps waiting for the right time. One of the famous examples are Microsoft. It took them 13 years before earnings caught up and they hit a new all-time high on the share price. That was sustainable, I should say. And that's also the exact opposite of, at least I can't speak for you guys, but I can say that that's the exact opposite of what I used to do whenever I started investing. So

Whenever I started a company that I found interesting, you spend so much time on it that you really want to invest in it because you fall in love with that company. What happens is that, hopefully you're smarter than me, is that whenever something's like a borderline, probably could buy it, you start to torture your Excel sheet and then you can justify any stock price whenever you torture Excel enough.

And so what I want to do here with this mastermind episode is very much to talk about LIVCO, talk about the pros and cons, but then best time to study a company is whenever you don't want to buy it. So you can really get to know the thesis, and then you can shelf it, put it in a watch list, type up your notes. And then if it becomes more interesting, then perhaps you take a closer look. And so if I can just talk a bit more about that, I've been asked multiple times about

making a list of the stocks that we talked about here in the mastermind group here and how that stock has performed. And I always say, no, part of it is because I'm lazy. I have to be completely honest. Part of it is because I'm lazy. But I also think it defeats the purpose of what we want to do in these discussions. Let me just give you an example. I was pitching LVMH in Q4 2023, and I still have the stock on my watch list, but it hasn't

hit the stock price where it's interesting for me to build a position. So it's also kind of like, it's the wrong yardstick. We talk about it because we're interested and because we want to learn more. We don't necessarily talk about it because we're investing in it. And I should say, if anyone wants to do it, please do it. It's all out in the public space and you can do it. But also, I think it's perfectly fine to put your money where your mouth is. So you can also, like I said in the introduction, I published my track record one

once a year. And so everyone can go in and see what I invested in and what I've sold. And I think that's perfectly fine. But I also think it's important to say that is not always what we talk about here on the show. We talk about stocks that sometimes we invest in, other times just on a watch list. And a company like Livco, I just don't find the valuation right now appealing, but it's still a great company. So just like Verisign, I think it's a great investment at the right price. Stig Brodersen

And so if I can use that as a segue to talk a bit more about the valuation. So someone, unless the stock has crashed since we recorded this message, they're going to be looking at the numbers and they're going to be like, "Look, dude, this is an expensive stock. There's a PE of 47." And that goes directly to my point. I think the stock is too expensive to build a position. At the same time, I also want to say that there's an environment right now, for example, with the demolition of tools,

segment where there is severely under-earning. So keep in mind, whenever you're looking at something that's cyclical, very often the time to buy are the times whenever it looks optically most expensive. And that's more general observation. Again, I'm not saying anyone should build a position in LIFCO, but it's just another thing to think about. But whenever you look at a company that consistently has a return on investor capital of more than 20%,

you have to look at the starting multiple, whatever you're buying, you have to normalize that, I should also say. And then you also have to consider how long is the runway. And so whenever I first started studying sale or acquire, you know, I

One question that always comes up in an earnings call is that someone asks, "What does the pipeline look like? How many entire companies are there?" And in the beginning, I was so excited. I was like, "Oh my God, the CEO is saying the pipeline looks great. I have to put that down. It's great news." And obviously, whenever you've gone through enough earnings calls, you're like, "Oh, the question is always there with a terrible..." Now, the question is valid, but the management has zero incentive to tell you that the pipeline doesn't look good.

Like why would they? Like the stock market would tank and entire companies are looking at would jack up the price because now it's known that they don't have a good pipeline. It is difficult for you as an investor to see and evaluate how good is the pipeline really, which is why again, we're going back to track record. Stig Brodersen : And I think one of the misconceptions I'm seeing right now in the value investing community, especially because the stock markets are so expensive, especially in the US,

And there is a very

strong emphasis on quality, which again, it's good. We should like quality. But there is this misused, and I think I misused it myself, this misused quote by Munger where he talks about, "Hey, if you have," and I'm completely going to butchered it, but if you have 20%, whatever, I think he said 18% return on invested capital for a long period of time, you're going to end up with 18% instead of something that's 6%, even if you bought it at a discount.

But perhaps what you also should have mentioned is that it's really in the long term. And some people think long term is a year or two years or five years. No, we're talking long term. And let me give you an example. Let's say that you bought Livecore today and it compounds 20% annually for a decade. And then there is not a lot of growth runway. The market realizes that and there's a P of 10.

Well, then you end up with a return of 2.6%. If you think they can compound 20% for two decades, and then the multiple contracts to a P of 30, then you have a 17.2% annual return.

And so it's really the runway in how much your return on that invested capital is. And my crystal ball is broken. So you have to make that assessment yourself, and you probably shouldn't pay too much attention whenever the management is telling you that the pipeline looks good. Stig Brodersen : And then the last thing I want to say here before I throw it over to the group is that LIVCO disclosed this number, which is

is called Return on Capital Employed Excluding Goodwill and Other Intangibles. It just rolls right off your tongue. And it's currently at 128, and it sounds amazing, like trading 12 months, 128. Now, it's a good measure, I should say, of capital efficiency. Please don't confuse it with shareholder return by any means. It's an indication of something, and then it's not an indication on something else. And so

you can say it really means it's asset light. But also if you look at Goodwill, and looking at Goodwill is very important if you're looking to sell or acquire because they typically have a lot of Goodwill on the balance sheet, you have to understand how does that go to the balance sheet in the first place? Stig Brodersen : So many companies today with the type of companies we have today, they're bought above the book value. And so the excess cost above that book value would be consolidated on the acquirer's balance sheet. And so let's say that you pay

$10 million and there is a $1 million book value, and then you have $9 million in goodwill. But keep in mind what you're really doing if you're a sales acquirer is that you're buying the earnings power of the target company. And so you might say, "Well, does that mean that it would be better to buy a company with a high book value? That would give you a lower goodwill number." Yes, but then you also have more CapEx to maintain. So you have to figure out, is that a good thing? And then you might say, "Well,

then you should just have as much goodwill as possible because then I don't need to maintain it. But if you want as much goodwill, it's very easy to get a billion dollars in goodwill. You just have to pay someone a billion dollars for a $1 book value. So no, you also don't want that. But I still think it has value if you look at the wonderful key metric, return on capital employed, excluding goodwill and all unchangeables. Stig Brodersen :

But you really have to understand what goes into that number and what does that mean for you as an investor whenever you evaluate that. And that is generally what you want to see as an investor because it allows you to invest in a company that's growing really fast and that's capital light and they can play capital without leverage. Stig Brodersen : I'm going to throw it back over to the group. I don't know if anyone's falling asleep while I went through the accounting exercise here, but I'm going to throw it back over to the group now. Stig Brodersen :

interesting companies because the success of them really turns on their discipline around purchasing and their discipline around and their ability to identify companies that, as you pointed out at the start, the founder's leaving, founder knows, or the CEO's leaving, CEO knows everything about the business. He can see the cliff coming. He's just sold to you just before the cliff hits. So you want a long track record, see them doing it pretty consistently. And then they need some infrastructure, which it sounds like they have to manage the

the underlying companies. And I think that's been a success of Constellation is that they've done that really well. The other thing that they have done, Constellation in particular, is that they, you know, when you compare them to something like Valiant, which didn't do very well ultimately, but Valiant was doing bigger and bigger acquisitions and the acquisitions were more and more expensive as they were going along. Whereas Constellation, like they've kept their discipline all the time. They really do very small acquisitions. And so, when you said that like their most recent acquisition was a $2 million pro-dental

I thought, well, these guys sound a little bit more like Constellation than they sound like Valiant. And so that's a good thing. And the pipeline for these businesses, I think, is basically endless. I think there are always going to be these small industrials around. Your main competitor is always going to be private equity, but maybe that even just falls underneath private equity. It might be too small for private equity. It doesn't quite move the needle for them. They need bigger stuff. So they might have found this little part of the market that they can arbitrage really effectively where

It's too small for private equity. They're going to give a good exit to a founder who doesn't need to sort of maximize their return because they can give them potentially stock or at least you can invest with us and continue to compound the risk. You're wholly pro-dental. You can be a smaller part of a much bigger organization that you know is going to be run the same way into the future. So I agree with you. These businesses are potentially great little businesses because they

They do a very good job of reinvesting the cash flows. And so that's always the challenge when you find a really great business that doesn't have a lot of growth internally. What are they going to do with that cash? They're going to go into a silly acquisition. It's always a risk. They're going to return the capital. So that's why they're buying back stock. That's a great signal. And extended periods of just chipping away at the stock price. I love seeing stuff like that.

Because it means that they're in the shoes of the investor rather than in the shoes of the operator. So I think all of these things, without having dug into it, I think this sounds like a really promising, but the purchase discipline for you as the investor, I don't know really what, I don't really invest on PEs, but 46 PE, that's optically expensive unless there's other reasons why that's not the right metric for something like this. What is it in terms of EV, EBITDA?

return on what they're really investing rather than that more complicated, longer version that you gave. Let's take a quick break and hear from today's sponsors.

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It's way too expensive by any metric I can pull up for you, Toby. It's not unreasonable. Whenever I say it's 47, normalized is probably a little lower, but it's not like you're going to be thinking, this is a bargain. There's probably somewhere where it's 20. No, it's not. I also just wanted to give you a few corrections. So the company that they acquired had $2 million in revenue. It wasn't a $2 million acquisition.

And that's typically lower than what they typically do. I would imagine that they're still competing with private equity. I think you bring up a good point there, Toby, about Constellation Software and what they do. This is a bit different. They are typically doing acquisitions that are slightly bigger, typically 10, 12 million-ish, typically even more whenever it's demolition and tools. And the problem is that the higher you go up, the higher multiples you typically pay, because that's just the nature of the game and there is more competition.

And so to your point before, they have to stay at a reasonable level in terms of the size of the acquisition. So the question is also, whenever you're talking about the runway, do they have the right organization to scale the number of acquisitions? And you know, Constellation Software is sort of like the gold standard. I think there's like, what, 130 years or something crazy like that. That's not the case here for Livco. It's like, if I look here over the past decades, like between 8, 18, and

And keep in mind, they have like 14 people here on the team that has the, they sort of like have the serve on finding those companies. And then it has to be approved by the board, DivCos board, which one they're actually going to acquire. And so you also have to think, okay, if they're doing roughly 14 right now, like it's one per group manager, can they scale up to doing more than one acquisition per year? Because they are so decentralized. The answer to that is probably yes. But it also, again, we talked about growth before.

we're talking about, you probably need to see this go on for like two decades before we can justify the current valuation. And so if you're thinking that sounds like a tall order, I completely agree with you, which is exactly why I don't build a position in LIVCO. But at the same time, it's also why I'm thinking it's a great company and we put great companies on our watch list. And then whenever we have a chance to buy it at the right price, that's whenever we build our position. Stig Brodersen :

I think for very good businesses, you really only get a chance when there's a systemic meltdown because they just never trade cheaply to the rest of the market unless there's some issue, in which case now you're questioning whether the quality is actually where you thought it was. But I think you can have a look at how Constellation fares through every single drawdown. It never draws down as much as the rest of the market because everybody who follows Constellation knows that it's a really great business. And the moment that it comes off any sort of significant amount,

It's heavily bought. I don't think that necessarily you should think about it as something that has a protected downside. That's not what I'm saying at all. I'm just saying that it won't go down as much as the market because there are so many people who can... Once it's down 20%, it's heavily, heavily bought. I think just on your point earlier about how hard it is to run a serial acquirer, it's worthwhile going and reading the first decade or so of Berkshire Hathaway's shareholder letters just because you can see how hard it was for Buffett. He's pretty good at this stuff, how hard it was for him.

I think that's a pretty good start. And I worked as a lawyer, but doing private equity acquisitions. And that was really what cured me of wanting to do it. I think that it's so much more fun buying them when they're listed because it takes away that one thing where you don't know what the manager knows that he can see the cliff coming. And they do just trade cheaply sometimes for reasons that really nobody knows. It's just forgotten about. Just something happens and it's not reflected. So, I prefer listed stuff to...

to the serial acquisitions just might make sense. Stig Brodersen : Yeah, it's such a great point. And I'm really happy that you mentioned Constellation Software. Speaking of Constellation Software, I don't know if you're familiar with Lumine. It's not because we have to go through that thesis, also serial acquire, but I got a message from Clay yesterday who did a video on it. And he was like, "What do you think?" I was like,

this is just way too expensive. And then I thought to myself, it was just like whenever Clay said to me, "You should buy Constellation." And I look at it and I was like, "I can't do that." So what happened? Clay sold out of Evolution, I bought back in, and Constellation had gone to the moon, and Evolution is just tanking. So of course I bought more. And you should probably listen to Clay and not to me, because very often it is so that good businesses

continue to be good. There's something in that DNA that's just good. And of course, even in my default, it is, and I'm not talking about evolution necessarily here, but it is difficult to hit those turnarounds and say, oh, the PE is just really, really low, but it's just about to turn and it's going. There are some investors who have done that successfully. I don't think too many. It's just a very difficult game to play. So sometimes you just need to pay up.

I don't think you need to pay up lift car prices right now, but you need to pay up.

So Constellation has dealt with that. I mean, Constellation is interesting for lots of reasons, but they've dealt with the problem with their pipeline getting – they've got too big. They do so many acquisitions, they've just sort of run out of targets. So they've pivoted their strategy a little bit from VMS to just anything that doesn't have – vertical market software doesn't have to be VMS software anymore. It can be – well, it doesn't have to be VM software anymore. It can be anything really that fits other purchase criteria. Yeah.

It's very interesting. One way of doing it is just to buy a little bit. If you're very, very confident in the business, but you don't like the valuation, you can just buy a little bit and watch it. And then everything cycles over the course of a year. I think that the average stock is like one third of its price over the course of a year, up and down, just on fluctuations. And then you buy a little bit more if it gets cheaper and plan on holding it for a very long period of time. And you know that there are going to be stock market crashes. There are going to be

little corrections along the way and you can take advantage of those things watch the fear and greed meter on cnn when it dips below 20 you know have a little nibble so that's always of doing it so you guys i say it's kind of tongue-in-cheek but maybe i'm extrapolating too much from technion and liftco here but some other examples i've probably seen but you know why it seems like there's so many uh serial acquisition companies in sweden is there is there any reason for that is that just uh completely random or am i am i mistaken

Stig Brodersen : I don't think it's random. I think that there are very good reasons why Sweden is such a great country to start a company. I should also say, I used to live in Sweden, not that necessarily makes it a good place to acquire, but I think whenever you live there, you just see the level of transparency and the level of trust. Stig Brodersen : Just one example, everyone can go in and check any private company and their financials over the past decade.

And so already that makes it easier for you to find targets and you can just call people up and be like, are you interested? But it also takes away the whole BS element that you see so much in business. You meet people all the time who want to impress you with this and that. And if you're in Sweden, you can just find that person, see their company and like, oh yeah, he had like $20,000 in equity. He was probably just all big talk. And so

whenever you have that transparency with other people, there's just a lot of filtering that automatically happens. And it makes deal making a lot easier. You don't have the same legal expenses as you would do in other countries where there's a significantly lower level of trust. So I think that's part of it. But I also think that there is a part where

other people see what you do and want to do the same thing. The Silicon Valley effect, it's sort of like you have people there who have been very successful and then they're angel investors and they seek to do their thing. And you're seeing the same thing in Sweden. It's kind of remarkable in Sweden, not just whenever it comes to CEO acquired, but also when it comes to tech. Stockholm has been such a hub. I think in Europe, I think only

London, Berlin, and Paris, I want to say, but they're pushing it way above the weight in how much money they can attract just because that's what people do, which is kind of ironic. So I'll probably point to that. Enjoy the pick, Stig. Very interesting. Yeah, thanks for highlighting it, Stig. All right, gents. Thank you. Let's throw it over to Sean.

Okay. Hopefully we'll last, but hopefully not least. My pick today is Ulta Beauty, ticker U-L-T-A. And it's a company that I was reluctant to dig into for a while just because it's hard for me to get excited about makeup and skincare. But I kept seeing the stock getting pitched in different places. And I guess after I saw that and after I saw that Berkshire had snapped up a few hundred million dollars worth of shares last summer, I was like,

I decided that I finally needed to give it a look. And to be fair, this wasn't a Buffett pick by any means. It was a small position. So it was definitely one of his lieutenants who would have bought it. And they actually quickly flipped it. So much for following Berkshire into the pick. They sold it the next quarter, but the average price paid was about $385 per share, which for context is just a little bit below where it's trading today. So

We're not all that far from a price that apparently some folks at Berkshire thought that the stock was attractive, even though they abandoned it. And right off the bat, a few things really stand out to me when looking at Ulta. Firstly, this is a company with an average return on capital north of 27% over the last five years. And it's a similar track record if you look over a decade and two decades. And their revenue has grown by nearly 10% a year over that same time.

Earnings per share have compounded by something like 16% per year. And part of that's because of growth in net income, but also because of about two thirds of their free cashflow are being redirected toward share purchases every year. And just to go on a little tangent about that, I do think it gets overlooked. And we've probably talked about it too much already in this episode, but you can get earnings per share growth without earnings actually growing. I know you guys know that, but earnings are the numerator and in the denominator, you have the number of shares outstanding. And

If each year you're chipping away at that, you can still get compounding earnings per share growth. And my favorite example, which is another company I've looked at recently is AutoZone. And they've repurchased something like 90% of their shares in the last two decades. And that doesn't just translate to a 90% increase in earnings per share. Really, the key point here is that that actually is a 10 times increase in earnings per share, right? Because if you have $10 million in earnings, 10 million shares, you have $1 in earnings per share, but

If you bring that down to $10 million in earnings, but you have a million shares, you've 10X your earnings per share. And then when you combine that with growing earnings by 10 times, that's how you get a stock like AutoZone that's actually been a hundred bagger. I don't think Ulta is going to deliver those kinds of returns, but I really love that they can afford to do these large scale buybacks. And they're well on their way to repurchasing as many shares as AutoZone has. I mean,

that's probably an overstatement. It'll take them a very long time to do it. But in terms of buyback yields that they've been doing for the last five or 10 years, it is fairly similar. I hope they'll keep doing that well into the future. If you look at, well, as I said, they've been buying back shares for more than a decade, but just since 2021, its share count is down from 56 million to 46 million, which is a decline of almost 20%. And that number is probably just going to keep declining by three to 5% per year. I think the buyback yield is

currently closer to around 5%, which is on the higher end of that spectrum. But immediately with these kind of large buybacks, you're limiting some of your downside because you know you have this tailwind of share repurchases that's going to support earnings per share growth. And that's obviously the key deciding factor over the long term, what your returns will look like. And you can get a few percentage points of nominal growth in the business's net income,

Combined with that repurchase yield, you're well on your way to a double-digit return as a shareholder, which I find very satisfactory. The wonderful thing about Ulta is that this is a company that has consistently done both, as I've said. Normally, if a company is returning so much of its cash flows to shareholders, then you wouldn't expect the underlying business to be growing, like what we talked about with VeriSign, because they're not reinvesting much into CapEx that is actually expanding the business and

Again, what's really struck me with Ulta is that the returns on capital are just so high. Over the last decade, their incremental returns on capital have been over 60% at times, which is how you get compounding net income at 18% a year since 2015, while only reinvesting a third of your free cash flows. Your return on capital going forward is going to basically be the returns on those incremental investments times the percentage of your free cash flow that's

being invested. And with Ulta, it's very attractive on that front. New Ulta stores have just been incredibly profitable. And it's safe to say that those incremental returns have come down and will continue to come down as the business has matured. I don't think it's crazy at all to think that they can continue to grow earnings by 7% or 8% per year on average over the next five years. And

Like I said, with a couple percentage points of earnings per share growth from repurchases, I don't think a double-digit return is unreasonable at all at these levels, especially when you're talking about this is a stock that's valued at PE of around 16 or 17, which is actually a bit below its historical range.

And with just under $2 billion of net debt on an $18 billion market cap, there's not a ton of credit risk here either. This is not a stock that is going to go to zero. The picture is actually a little brighter than that too, because most of that is not even truly debt in terms of corporate bonds. It's mostly just capitalized leases. And so the question is, why has the market soured on the stock? This is the

This is the time where the thesis blows up and you can tell me why this is a terrible pick. But it was such a strong track record of growth and profitability and share repurchases. You wouldn't expect the stock to be down 15% over the last year from what's already a pretty reasonable valuation. And at the low, the stock was actually down over 30%. So the opportunity is not quite as attractive as it was. And for full transparency,

I am long Ulta. I was able to start a position a few months back at an average price of between $350 and $360 per share. I do think there's still meat on the bone here. My fair value estimate for the company is about $450 per share. So just a little over 400, I think that's a decent margin of safety. But yeah, to go back to my own question, I guess, my next thought was, obviously, what am I missing here that the market is seeing?

And it's a familiar story at this point, but Ulta saw a lot of growth get pulled forward during the pandemic because self-care became especially important to people, I think, while they were locked up at home. And now there's been a bit of a hangover because all that was pulled forward and now the business is normalized. And what really freaked the market out, though, is that management basically came out and admitted that they were facing some really intense competitive pressures and

I think the number, and this is enough to maybe scare you away from the stock, but I think the number is something like 80% of all stores have been negatively impacted by at least one new competitor recent years. And around 50% of their stores have been impacted by multiple new competitive openings in their immediate area. And that sounds really bad. And I think it is bad. And I could be understating things here.

And this could reflect poorly on me, but now that Q4 earnings actually came in better than expected, it seems like some of the fear has come out of the market a bit here. Management has said that they're probably through the worst of those competitive pressures. Those new stores have opened, some of them have closed, some of them have stayed. But now we have an idea of what the business is going to look like going forward, and it probably isn't as

Hasn't been as painful for margins as some people feared, and now the stock is starting to recover. But to maybe just take a step back, what has always made Ulta so special is that they're truly a universal beauty retailer. For context, for decades, the beauty industry had these very rigid boundaries where high-end brands might only be sold at certain department stores. And if you want just cheaper mass market products, you had to go to a drugstore.

And Ulta unified these worlds, putting luxury brands on the same shelves as $5 mascara. And I think women love that diversity of options. I mean, who wouldn't? I don't think that's unique to women. But my impression is that many women want to have a one-stop beauty shop. And the reality is that not many women exclusively use one brand for everything.

or even just exclusively use only high-end or mass market beauty products. They use a mix of brands at a variety of price points, from their hair care, to their skincare, to their makeup, whatever it is. And the blend of products that people use is completely unique to that person. They might use fancy eye creams and lotions, but for their actual makeup, they don't want to splurge in the same way, or maybe it's the opposite, whatever it is.

Ulta continues to have the widest selection of brands of any beauty retailer. And I don't have a lot of conviction in this being their moat, but maybe that is a moat in some way. And kind of behind that is the fact that implicitly, to bring all those brands together and to kind of flip the beauty industry upside down, they had to convince Estee Lauder, for example, that their products could be on the same shelf as e.l.f.,

which is a very affordable discount beauty brand. And by doing so, they convince these high-end brands that it won't hurt their perception at all. And it might actually help them to be sharing shelf space with these more mass market products. Reflecting the fact that we live in a world where you might see a woman on the street wearing Levi jeans, who's also carrying a $2,000 purse. People are complicated and fashion is

is in a black and white hierarchy in the way that it used to be, fashion and beauty. I think Ulta is the biggest beneficiary of that in short. But I don't want to understate the risk of competition here because that is what would kill this thesis. From Walmart to Whole Foods and CVS, there's many different places you can buy

beauty products. The biggest competitor by far is Sephora. In some ways, you could say Sephora is winning. Sephora is probably Gen Z's number one choice for beauty, with Ulta as a close second, I would say. If you look on social media, whether it's TikTok, Instagram, or Reddit, Sephora has a considerably larger following, which is part of the reason why I say it's more popular with Gen Z. But

The difference between Ulta and Sephora is that Sephora is a global retailer, whereas Ulta only operates in the US. And probably more importantly, Sephora is owned by LVMH. And because of that, they carry more higher end and expensive products than Ulta does. So Sephora doesn't carry the same range of mass market products that would make it a universal beauty destination the same way.

And the wrinkle here that really stands out in Ulta's favor, that kind of has brought me back into being bullish on the stock is their loyalty program. They have over 44 million loyalty members.

And 95% of all their sales come from those loyalty members. So basically everyone who shops at Ulta signs up for the loyalty program. And you must be thinking, okay, this must be an incredible loyalty program. And in a lot of ways, it's just a standard program. You spend money, earn points, and then you can use those points to get special discounts or access to limited time products or whatever it is. But Ulta's loyalty program is considerably more generous than Sephora's. And I think that's in part because...

As we mentioned, Sephora has more of a luxury focus. So giving away too much stuff for free would undermine that positioning and that image. And the other reality is that Sephora members have such a massive amount of unused points that they've stored up. It would be really, really costly to the company if they suddenly made those points worth twice as much or whatever it is. They could do it, but without significant cost.

Meanwhile, people rave about Ulta's loyalty program. It's a big reason why literally people are loyal to the company. I spent an hour reading through the Sephora and Ulta subreddits just to try to learn about how these passionate beauty customers think. I was just shocked to see that in a Sephora subreddit, people were bashing Sephora's loyalty program and praising Ulta's. That's anecdotal, but there maybe is some signal there.

The competitive pressures are real, and all it takes is one tough competitor to ruin returns for shareholders. But at the same time, I think Ulta has been around for decades. And as have really these other alternatives, nothing has structurally changed. And the pullback in the stock looks kind of like an overreaction to me in hindsight. And I think the only reason it hasn't recovered more is because 2025 is supposed to see a modest decline in earnings before growth recovers again. And

most investors are anything but patient. But over the longer term, management has been very, very clear that they expect low double-digit earnings per share growth. And if you have 4% coming from buybacks, that suggests that they think the business can consistently grow earnings by 7% or 8% a year. And that growth is coming from a few areas. For starters, there's room for them to have another 100 or 200 full-size stores in the US.

On top of adding some smaller footprint stores that they're experimenting with, for context, two decades ago, Ulta brought specialized beauty retail to the suburbs, while Sephora has remained mostly focused on cities. And now Ulta wants to be the primary beauty destination for smaller towns with smaller footprint stores. And I think that's really interesting if you think about it, because there are hundreds of towns across the US where their only option to buy beauty products is probably from Walmart or Amazon.

or Amazon. So I'm really excited to see how these smaller stores do in more rural areas where you're bringing in a sort of specialized retailer to a cohort of women who might've never really had access to that before, unless they were willing to drive 30 minutes or an hour. And the other thing too, is that they have this strategic partnership with Target that I think I should mention. Something like 500 Target stores nationwide have these mini Ulta shops basically inside of them

But that's only about one fourth of Target stores. So don't get me wrong, they're not going to get massive growth from expanding into every Target location because that would cannibalize their own full-size stores because a lot of times you'll see an Ulta right across the street from a Target. So they're not going to 4X those many stores, but there is probably some room for continued expansion there and

Lastly, on the growth front, the thing that I'm more iffy on is that they plan to expand internationally for the first time into Mexico.

In 2020, they had actually wanted to expand into Canada, and obviously COVID threw a monkey wrench into that. At first, I thought Mexico was a bit of an odd place for them to focus on, since Canada is a lot more culturally similar to the US. But after listening to management, I realized it's probably due to cultural reasons. And you're thinking, okay, what do I mean by that? And management has said that basically,

Hispanic customers spend by far the most per capita on makeup and beauty. So it's less surprising to me than that they're drawn to go south of the border. And so again, I said I'm iffy on this because I think international expansion is always harder than it sounds. And I wouldn't be surprised if this turned out to be a massive misallocation of capital. It gives me a little bit of optimism that they quickly pulled out of Canada. And if things go against them in Mexico, I'm hoping they'll have the discipline to

to do the same thing. And the last thing I want to touch on here, and this is a big elephant in the room in terms of competition, and that's Amazon. Five or 10 years ago, I probably would have found Amazon more concerning. But at this point, again, it's not exactly a new threat. And it hasn't hurt Ulta in the way that it's killed off some other retailers. And I think that's mostly because, and this is a really important part of the thesis, is because shopping tends to be for beauty. Shopping for beauty tends to be

a very in-person experience. Ulta's management always talks about their most active set of customers who they call beauty enthusiasts. And these are people who want to not only go into stores to test out makeup, but they also are really keen to discover new products and brands. Beauty is probably a hobby for them as much as anything else. And maybe they have a few basic items that they buy with recurring orders on Amazon, but

They also have a number of products only available at Ulta or Sephora that they probably rely on. And all you have to do is walk into an Ulta or Sephora to see this in action. When you walk in, there's probably, you'll see a dozen different women standing in front of mirrors, just putting on lip gloss or trying different color palettes. So this is a real thing. This is not just BS to try to justify why Amazon's not a threat. I think beauty is particularly resistant to e-commerce.

because of that service value. The fact that you want to go in and you want to chat with an employee and have them give you tips and tricks about your beauty routine and analyze your skin type and all that fun stuff that I know we all love to do. But yeah, that's pretty much my pitch. I rambled on here. The only other thing I'd mention is that because Ulta does also offer these more affordable mass market products compared to Sephora, at least, I think that makes them a bit more economically resilient.

Then the last thing is that as self-care and beauty have become intertwined terms, beauty spending has risen with each generation. Millennials tend to spend more on beauty than Gen X, and Gen Z tends to spend more than millennials. Gen Alpha is already showing signs of spending more than Gen Z.

So those trends really give me confidence that Ulta can continue to organically grow its business. And like I've said, at the current valuation, if you can get even half the average growth in net income they've had over the last few years, plus their share buybacks, you're well on your way to a double digit return. So with that, I'll say that's my pitch and I'll let you guys tell me what I'm missing.

Yeah, well done. I thought that was a really great pitch, Sean. I like the analogy of this to like an AutoZone or an O'Reilly or any of those sort of retailers that have done very well by repurchasing stock when they get cheap. And I think you're right. I think it's pretty durable.

pretty enduring. And I was surprised by that stat that the kids spent more money than the... I've got a Gen Alpha in my household. I wasn't aware of that. I have to go and ask my wife if that's true. But yeah, great pitch. I thought that was a really good one. I don't really have anything to add. I thought it was comprehensive. Good job. Thank you.

So I should say that whenever I email with Toby and Hari, typically, I don't know what they're pitching. I mean, I would know a few days before, so I have time to do my research, but I don't know what picket is. Which Sean, because he's with TAP, I actually went into his publishing schedule to see what kind of stock. And I thought to myself, there was a different, and there was something called Ulta, which I thought was an energy drink. So I was like, no, I don't know anything about energy drinks.

But then it was, oh, we should do Jundir. Great pick. So I messaged Sean's like, okay, can we do Jundir? And Sean was like, let's do Alta. Because of the women in my life, let's do Alta. And it was kind of, I should mention, Sean actually got married last month. Congrats. Thank you. Does she show up at Alta? She does. She does. And now it's funny because...

I feel like I understand Ulta well in a weird way because there was an Ulta across the street from my high school. And the big activity after school was you walk across the street, go to the McDonald's. And then if you were with a group of girls and the activity was, we're all going to go to Ulta. And so it was more than one occasion I got dragged to Ulta. And I'm sure I've been with my mom a bunch of times and I've been with my now wife a bunch of times. So I

So I know Ulta well, and I used to, I was saying to Stig earlier, I used to hate going there, which is why I had this massive bias against researching the company because I had all these negative experiences of standing in the corner, twiddling my thumbs. And now I see the company in a completely different light, which is so funny. And now I'm actually like- You're not the target market. Yeah, I'm not the target market, but I'm asking my wife, I'm like, hey, can we go to Ulta today? I want to chat with the salespeople. I want to know-

She's like, finally, all my dreams have come true. Yeah. Yeah. I want to know how the new Wicked themed, you know, makeup palettes are doing.

You know, Sean, I asked my wife, because I don't know. I kind of feel I'm not the tag group. Perhaps Ulta would pay me not to wear their makeup. I don't know. But I was looking at my wife. I was like, oh, Sean's going to pitch something called Ulta. Like, I never heard of it. And she looked at me. She's like, it's everywhere. And we've been in one together. And I was like, what? Apparently, we have, because she said it was right next to that Barnes & Noble. I actually knew where we've been to. So

I really didn't know anything about it, even though obviously I've been there. But I looked at their investor presentation and it's wonderful. Now, of course, whenever you do investor presentations, you have to be a bit careful because everything is fantastic. It's 200 pages. I should say I only made it through the first 100 pages. But I was like, the more I read, the more I was just, this is fantastic.

Stig Brodersen : Of course, there is a discussion in terms of what is the price, what's the value, but the company was a lot stronger than, well, I shouldn't say than what I thought because I never heard of Ulta apparently before, or at least I hadn't paid attention. So I think the way my wife explained it to me was that you would go to Sephora if you have been scouting like this face cream, but then you would buy your basics at a place like Ulta.

perhaps also in larger quantities. And I was thinking, oh, so is it like the best buy effect? Back in the day before they had the whole price guarantee thing where you would go there and then you would buy cheaper on Amazon. It's like, no, that's not how you do make up, which I didn't know. And certainly not how Ulta would work. And I kind of felt that was quite interesting. Very impressed by the membership program. Like you mentioned, 44 million members. And

and 95% of their beauty sales are from members. Hold up some stats here, 9% increase in members, 11% sales spent increase per member. Margins are improving. I kind of felt that was quite interesting. I don't necessarily know if I position Ulta the right way if I say it's mid-market, but one of the challenges that I

I see right now in the States is that there's this polarization going on because of the wealth gap where you have some of the luxury brands that are doing really well. I know that the luxury sector is a bit of a pain, but there's still some that's doing really well. And you also have the Donald Generals of the world. And yes, I also know that they're facing headwinds, but you've seen that segmentation. I'm not talking about what happened over the past few years, but you have seen that. And so I was trying to figure out where Ulta was in that

And because I was worried if it's completely mid-market, I've just seen so many mid-market brands that just disappeared because of that. And because I'm reading LVMH's filings, I've seen that luxury, many of the brands are hurting by selective retailing, which is more or less Sephora, not completely, but it's the biggest chunk there. They're just doing wonderful. So perhaps to your point, John, it is an industry thing more than anything else. And perhaps the positioning

doesn't matter too much. I can't really, I can't figure out this tailwind from social media. So whenever I say tailwind from social media, there's probably, I didn't even know it was called generation alpha, but perhaps some out there is like, but you know, social media, we've been that, had that for 20 years, whatever, like what gives? But I think what I'm seeing right now, and I've

I think Toby has said that he's been on TikTok. I'm not as young as him as Toby. I also think Toby said for the record that he had to delete it because he was too crazy. I looked at it and it just hacked me immediately. So I had to take it off my phone. Otherwise, I wouldn't have got anything done. Right. And I see that trend right now. I don't use TikTok. Probably social media is not the right term. Perhaps it's the whole influencer economy that has this spillover effect into Alta's

No, I was, and I know this was a bit anecdotal, but I can't help but mention it. So it was Christmas not too long ago and celebrating with my family as I always do. And one of my nieces got a game. And the point of the game was that you had to choose your YouTube influencer, and then you win the game if you got someone to subscribe to your channel. This was a board game.

And I mean, I'm just like that old millennial who's like, what happened to Triol Bichut? Like, come on. And she's like, she just turned 10 years. Is that what you do whenever you're 10? Is that you try to get your friends to subscribe to your channel? It's sort of like, and I don't really know, I don't know what to make of it. I was speaking with an agency the other day about the whole, because we live off advertising too, to some extent. And he was like,

"Yeah, you know, then there's you guys, and then there's also something, Kardashian something." And it's like, "I've never heard about that. I think it was a woman." And what? And apparently, it's a whole thing. And I probably just disclose how ignorant I am about this, which is probably also why I'm hesitant to invest in something like Ulta. But I think my point, what I want to throw it over to you, Sean, is

How much is this an opportunity that you have all of these influencers? How much is that a tailwind?

No, it's a good question. It's funny you bring it up because, again, this shows our ignorance here, but actually Ulta is in the middle of a viral sensation right now as we speak. With Gen Alpha, they've started selling these. And it's so funny because for Christmas, my niece gave me these, but they're mini makeup products. I didn't even realize they were for Ulta when I got them, but it's a mini makeup palette. And it's like mini bottle of conditioner or whatever it is. And they're actually really cute. And you

You can't even really play with them. I'm not really sure what the point of... But I just saw an article about them in the Wall Street Journal the other day. It's this huge sensation among Gen Alpha girls under 10 years old. And they're dragging their parents to Ulta so they can buy these little collectible toys. And I'm not sure how much that's going to impact sales. But I think, again, to me, it points to just the competence with which they are...

running this business. They know what they're doing from just operationally and a number of different points. And an increasingly important point is social media. And if you're just going off in terms of followers, like I said, I think Sephora is bigger, but Sephora also operates globally. So they're tapping into a much bigger pool of people where Ulta is only in the US. And so I say Ulta, it really is a very close second to Sephora. I think

I think it depends on who you ask. A lot of the women in my life that I've asked, I don't think they're strongly partial to one or the other. I think that Sephora and Ulta are used interchangeably, but ultimately, I think they both benefit from a growing beauty industry. That's what's so special about the beauty industry because this isn't Bed Bath & Beyond or Best Buy where it's like you're buying routine things that you need. Beauty is self-expression, it's identity,

It's who you are. It's how you see yourself. And ego is a powerful thing. And I don't even think it's just ego, but it's just how you feel. And there's a real networking effect too. I've heard all kinds of instances of people going to discover new products, but also to chat with the sales associates and meet other people that are really passionate about beauty. So if I were to make any counterpoint to the whole mid-market retail thing, it's that

and maybe I've been listening to Ulta too much, but that there is something special about the beauty industry in the sense that it's a hobby and a passion and an identity for people. And as long as Ulta can continue to be at the forefront of offering, I think the widest selection of brands. And also, like I said, they did this Wicked themed makeup palette. And I can imagine there are a lot of young girls who went and watched the Wicked movie and then they wanted to go buy that makeup palette. And so

their ability to do those timely kind of cultural launches, I think could be a real incremental driver of sales growth. So, yeah.

This whole influencer economy is just so powerful because influencers are doing this selling. You have so many influencers who are setting up their own brand and whatever. And I've read from the investor presentation that apparently it's a big thing in beauty as well. And I think we see that to some extent. It doesn't really matter which publishing house it was, but a reputable publishing house that came to us and said, would you like to write a book? And I was, about what? Why would anyone want me to write a book?

And they're basically saying, "We don't really care what you write about as long as it's within finance and you sell it." And I would imagine there's a lot of beauty influencers that would get a similar deal. And I would imagine that distribution is a big part of it. They'll probably made something along the lines of, "It will be this celebrity's own brand." And then they have eight different products or whatever. And then the influencer can come and say, "It has to be that, but blue or whatever."

And, oh, it should be that brand, but let's try to make it like this. And then that influencer will go out and sell it. I'll imagine that Ulta would be in a very strong position because then that influencer would say, go to Ulta because they have distribution. That's where you can get my brand. I'll imagine that's the business model. But one of the things I found to be quite interesting whenever I saw the margins and how they were increasing, and it might be because I've looked too much into Spotify that I'm

that I own for some time, but they have increased in margins for, well, many reasons. But one of them is that different artists or the labels promote their content, and that is reflected into better margins for Spotify. And so I was surprised to see that e-commerce was only 20% of sales for Ulta. And it's quite clear that they're using a lot of big data and they have all of that information. Also, it goes back to the loyalty program here.

where they can serve the right ads to the right users, which I'll imagine would be reflected into higher margins because all the brands that they're working with would want that to be promoted to the right people. And so I think that there is something there. I can't really quantify it that well, but that seems to be a huge tailwind. Stig Brodersen :

It's a credit to Mary Dillon, who was the former CEO of Ulta, that there even is any e-commerce sales at all. She bootstrapped that about a decade ago. And I think the number, I could be wrong, but the e-commerce sales doubled or tripled because of the pandemic. But again, that really gets back to that beauty is an in-person shopping experience. If you're going to put makeup on your face, you're going to use that product for a month or two months or whatever it is.

you want to know that you like the way it looks. And so you're going to go to the store and you're going to try it on and test it out. And so it doesn't surprise me that

e-commerce is a lower percentage of sales. And I actually think it's a good thing because we want people going to the stores. And I guess actually to be my own bear a little bit, the thing that really concerns me the most about the thesis is the Target stores. Because once Target has pulled and brought in Ulta's products onto its shelves, and now they needed Ulta to have a relationship with these beauty brands. Now that those brands have been on Target shelves for a number of years,

what's keeping them from cutting Ulta out as the middleman? And why do they want this frictional intermediary taking profits out of their bottom line? And so that really concerns me. And then related to that, and back to the point on e-commerce, if you're directing a sale in a Target store,

for Ulta is not the same controlled environment. They don't have the same oversight into the experience. And so that sale that might be made there is one less sale that's made in an actual Ulta store. And in the actual Ulta store, there may be more chances to upsell them on a wider selection of products, or you might have better trained sales associates or whatever it is. But I just kind of abstractly think, I don't know if I can really put words to why it's valuable.

but it strikes me as being very valuable to have people in the stores. We just talked about for the last 20 minutes how valuable that in-person experience is, and you get a little bit of that, but it really concerns me to have more growth in those mini stores and targets because it strikes me as making themselves very vulnerable to either target cutting them out or just undermining this ecosystem they're building of bringing people into their stores and building a flywheel from there. So

That's my own bull argument, bear argument against my pitch here. And we'll see. Just very quickly, what's your return? How do you break down your return expectation, you know, just in terms of organic growth, buyback and so on? Yeah, I'm thinking, you know, over five years, average earnings growth will hopefully be seven or 8%. And then three to 4% on the buyback.

And if you get any, you might get a little bit of tailwind and mean reversion on the PE, but right there at 10% to 12%, it's not something that's going to make you rich, but I think that's a satisfactory return. Yeah, I like it. Good pitch.

Just one tailwind that I don't think we covered, social shopping, how that's been spreading out of China and to the States and how that leans very well into Ulta's business model. More things, more smaller things at a cheaper price, and you spend more time there. Social shopping as an online experience, I should say.

One thing that certainly seems the opposite is the CEO stepping down. It was actually my biggest bad case and I waited with the good stuff here at the end, but he was only CEO for three years. And whenever you do that and you read the press releases, it's always like, oh, thank you so much for, and it was all done the best possible way and loyal service and yada, yada, yada. And

He also stops immediately. And whenever something like that happens, typically not a good sign. Again, we can only speculate what the real reason is. That's simply not something you put in a press release. Stig Brodersen : I was doing some research about this the other day because one of the stocks that I've actually pitched in the past was in evolution and the CFO stepped down, which was allegedly planned.

I'm always a bit concerned whenever I hear about top people who just can't wait to step down. And it was super, super planned for a very, very long time. Everyone is super heavy about it. Perhaps that is the case. One can only speculate. So I tried to running it through ChatDVT and this was trained in US data. And it said that, oh, it doesn't have an impact. It would have an impact for the first month, whatever of X, Y, Z, but then over 12 months, it wouldn't have an impact whenever an executive leaves. And I was like, that makes zero sense.

"Come on, Chad Gypsy, you're supposed to be the truth here." So I asked him, "Well, if the share price is flat over the data you've been trained on, well, the stock market on average has gone up by 10%-ish in nominal numbers. What does that mean?" He's like, "Oh, yeah, that's true. So flat, but not up 10%." So actually, minus 10%.

Again, I know that one could probably do a lot more research and figure out those time series. I don't have those in front of me, but for obvious reasons, it's typically not a good sign whenever a CEO would step down. What do you attribute that to, Sean? Just the stock's been flat for a few years. The devaluation got ahead of itself. I think so. Yeah. I think Mary Dillon set a very hard...

precedent to follow. I mean, I've read sell-side reports where they literally rave about her. She was beloved and always hit earnings targets, beat them, consistently grew, and really oversaw the transition into what it is today. And so anytime you have a leader like that step away, I just think that it's tough footsteps to follow. And I mean, again, over the last three years, I don't think

I don't see any reason why the CEO who replaced her, Dave Kimball, I don't really see any reason why the market would have disliked him so much other than I think that there was just such a premium being paid for Mary Dillon's leadership that you had this really kind of reversion to probably what is a mean of just average leadership. But he stepped down in the last week. So this is a real big change and one that I haven't really had the chance to fully

wrap my head around. So I don't know a lot about Keisha Steelman, who is the new CEO, other than this was very abrupt. And I was caught by surprise. I mean, I wasn't totally shocked because like I said, when you go from trading at a 25 PE on average or 30 under Mary Dillon, and then all of a sudden you're down to 16 under the new CEO, it's obviously some sort of indication that the market did not have nearly the same faith in him. So I was actually kind of relieved that he stepped aside. But

Perhaps you're right, Sig, that's a sign of trouble brewing beneath the surface, or perhaps it's a sign that Keisha Steelman will take Ulta in a better direction. So with everything, we'll have to see. Stig Brodersen : Perhaps he just really wanted more time with family, like they typically say in those press releases. He worked so hard to be the CEO and not for time and age, he just really wanted to spend time with the family. Stig Brodersen : I mean, some of these people make so much money in three years that you're just done.

How much do you need? All right, gents. Any concluding remarks here before I give you guys a handoff? Not from me. I thought Sean did a great job. Fantastic. Yeah. I hope we can bring you on again, Sean. That was amazing. Oh, thank you. It was a pleasure. I've listened to a lot of these masterminds, so it's very fun to be a part of it. Toby, where can the audience learn more about you?

My firm is Acquirers Funds. We have two funds, a mid-cap, large-cap, deep value US called the Acquirers Fund. The ticker's ZIG, Z-I-G. And I have a small and micro fund. Ticker's DEEP, D-E-E-P. And I'm on Twitter at Greenback. It's a funny spelling, G-R-E-E-N-B-A-C-K-D. Or you can check out, I have some books in Amazon. Just search my name, Tobias Carlisle, and they'll come up. Thanks for having me, Stig. Always a pleasure.

It's always a pleasure having you on, Toby, after more than a decade now. Is it really? Wow. I think we brought you on the first time in 20, well, it might be 2015. So yeah, 10 years now. Wow. That's amazing. I haven't aged at all. It's all that Ulta makeup, Toby. It's just because value has been so easy to make money in value. Yes. Right. Sean, you have a brand new show. Could you please talk a bit about that and where the audience can find it?

Yeah. My new show, it was formerly called Millennial Investing, and I took over as host, and then we rebranded it as the Intrinsic Value Podcast. And the idea is to do a lot more of what we did today. Every week, break down in full for an hour a different business, estimate its fair value, and work through the valuation, and then basically build a portfolio of attractively priced long-term stocks over time. And you can track along with that portfolio. We're going to have a corresponding

newsletter called The Intrinsic Value Newsletter. So you can find all of that and more on theinvestorspodcast.com. I thought you were going to say the new name was Alpha, Gen Alpha Investing.

Stig Brodersen : I love it. All right, gents. Thank you so much once again. And yeah, we'll see each other again next quarter. Take care. Stig Brodersen : Thanks, Stig. Thanks, Sean. Sean O' Thanks, Stig. Stig Brodersen : Thank you. Stig Brodersen : Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com.

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