Lecture on Economic Growth, Retail Sales, and Quality Investing Strategies

uh to either buy back their stock they pay a dividend or they take that money and they reinvest it in their business typically um now some of them pay out debt sure but most of them are doing those first three things um and that It ultimately uh drives economic growth so you know while there's there's unlikely to be a recession this year you could even see uh economic the economy really accelerating uh into next year but a lot will depend on that fed policy and financial conditions room remaining relatively easy on the retail sales front the consumer is strong you see uh this 2021 2022 era that's when everyone was at home and they were getting checks and they simply were uh they were spending it uh a lot on physical goods and that's typically what this retail sales number is telling you and then they stopped because they had plenty uh they had plenty and they uh you know there's kind of a mean reversion and then some and now we're back to kind of where we were preo you can see this at about 5% year-over-year uh and the retail sales number we a bit higher than that for now so the the consumer overall is relatively strong because of high uh asset prices both on the real estate front and the stock front and then uh the real pain though is in the the lower desile of um of income uh in in income producers and they are struggling you see that's why you see dollar storees struggling it's starting to creep up into more of the middle income as well but overall retail sales remain relatively robust there's always going to be pockets of weakness in every single economy so that doesn't mean that everything's going to hell in a hand basket just means you have to be cognizant of where that strength and the weakness is now that's the overview of the uh broader economy and markets right now but I'll let loot take over and start uh really digging into what is most important is how to think about uh investing in the right way as opposed to just chasing that yield so I'll let you take it over Luke thanks Justin yeah in order to set the scene before you can talk about how you can really identify these companies we want to talk first about what quality investing really means so this next slide really shows kind of a five bullet point summary on what quality investing really is Justin if you want to go to this next what is quality investing Slide the first being you want to focus on companies with strong fundamentals long-term stability and reliability so it's what we talk about all the time on the show and all the time with our clients is we want companies that are robust to various economic Cycles companies that have very strong balance sheet so we really first put an emphasis on har on high profitability metrics like return on Equity return on invested capital and again those solid balance sheets another thing that you want to keep in mind is you want companies that have a pretty sustainable competitive Advantage so if you have a company where they're in a product line that's really easy to duplicate or improve upon or really just beat on price these aren't the type of companies we're talking about we're talking about quality firms that will help you out perform in economic downturns we'll show some data a little bit later on on how Quality Companies tend to perform in different economic cycles and with all these things in mind these companies tend to provide these Superior risk adjusted returns so this next slide really shows four different companies uh examples of companies company a b c and d and so each description which we do have a handout for this uh for this presentation so you can take a look back at this later this just gives you an example of different you know these companies aren't in any individ ual sector they can be in different sectors but they all have these things that are in common so company a a tech firm has consistently High profit margins it's been increasing its market share in the cloud computing sector it has a robust balance sheet very little debt High return on invested Capital that would be an example of a company that is a strong quality company now we talk about all the time how boring businesses can be good businesses so you look at company D which could be a boring business an automat automotive manufacturer they struggle they have declining sales their profitability is declining as well and they sff competition this would not be within that category of what we consider to be Quality Companies so really the question then becomes as you see on this next slide how do dividends fit into this picture well first let's define a dividend a dividend is a a portion of company's earnings it's distributed to shareholders and typically that happens in regular you know quarterly or annual intervals and so it's really return of investor capital in a way and so looking at this chart which shows the power of dividends and compounding what you see here is the difference between the S&P 500's return with dividends so that's reinvesting those dividends and that's the blue portion of the chart and the green the gray is the S&P 500 index's price return so not thinking about those dividends at all so what you want to frame your mind towards when you're thinking about total return is that total return is your price return plus your distributions right those dividends that are coming in so dividends as a whole are certainly a large portion of the total return of this index in all indices looking back historically this going from 1960 until 2023 but it's also important to note that Dividends are an important piece of this but as we always say you shouldn't Chase yield you shouldn't Chase dividends it's just one part of the equation and so if you take a look at this next slide this is a very interesting chart for me because what this does is it essentially splits up the S&P 500's return which you just saw on the previous slide into different decades and then splits that up again into different quintiles meaning that each bucket has 20% of the S&P 500 so the first quintile represented by that second column is going to be the lowest dividend payers and the fifth quintile on the far right is going to be the highest dividend payers so what do you notice let's take a look at a complete decade so 2010 to 2019 that second row from the bottom what you see is as you move closer to the right further to the right away from the low dividend payers to the high higher dividend payers you do see a higher return the first quintile return just under 133% then that moves on to 13.25 and then 14.15 the third quintile but then it goes down and so that's because historically and you see this in most time periods actually right here is if you reach for those companies that are paying the higher dividends the fifth quintile the highest 20% of dividend payers you actually get a lower return then sometimes the overall market index like you saw in the decade starting in 20 10 and ending in 2019 but certainly then those uh certainly lower than the third and fourth quintile in a lot of these periods so that's to say that you shouldn't be reaching for the highest dividend payers what you should be focusing on is consistent dividend payers people who are able to grow their businesses so why might this be the case well here's a couple reasons on this next Slide the first is that Dividends are not guaranteed companies can reduce or even eliminate dividend payments and you see that all the time another reason is that high dividends can mask problems why might the dividend yield be high well it could be high because the company decided to pay out a large dividend relative to their share price but the equation works both ways it could be the case that the company's share price is falling indicating uh stress that the market has seen indicating an inability to pay its debt or excessive uh uh um or declining revenues which again jeopardize those future returns another is that you could be overlooking growth potential so on that previous chart what you saw is in the decade starting in 2010 you saw that the lowest quintile actually was outperforming and that's because post 2000 you see a lot of tech companies a lot of large companies today that pay very small dividends or they don't pay any dividend at all so just focusing primarily on who is paying a dividend means you may Overlook companies that don't pay a dividend but have excellent growth potential and that's why this next slide is really highlighting the five things on why consistency is key and what you should really be looking for one is steady earnings so those consistent profits that support those reliable compounding of returns those reliable dividend distributions second is Financial Health you want those strong balance sheets third dividend increases is what you should be looking for you want a company that can not only consistently pay its dividend but consistently grow its dividend next you should be looking for Quality firms that can maintain performance during those downturns and have that long-term Focus that's for strategic planning that prioritizes sustainable growth so these next two charts are really interesting to me really these next three charts next one is shows the outperformance of uh of quality which is what we're calling it high quality companies uh and it does that with lower volatility so the time period here is from 1990 until 2020 and you see each line represents a different bucket the gry line is the market overall and the bottom 50% of Quality Companies so the least Quality Companies are going to be that kind of turquoise line and the highquality companies are the dark blue line and you see it's very clear from the chart that the quality companies are outperforming in terms of a price return but if you look at that annualized return again showing pretty clearly that high quality companies are outperforming what's also interesting is that they're doing so with lower volatility so lower variability of returns year-over-year so that volatility is actually 14.7% pretty significantly lower than those lowquality companies and it's having a return more like the market the beta is about 094 over this time period And so just to illustrate that again graphically this next slide is showing how that ride is a lot more smooth so don't get muddled down by all these lines that are going on here I want you to really key in on that dark blue line and you'll see that as the other lines are oscillating all over the place size value low volatility just different factors over which you can sort the market even high dividend the Blue Line the quality line is offering you a far more smooth ride it's outperforming as you can see in that chart below that graph quality is outperforming 88% of the time more than any other Factor its best outperformance may only be 3.1% but really look at that worst underperformance only minus 1.5% over that entire time period this is about having again better risk adjusted returns and a more smooth investment experience and just one more illustration of this before I pass it back to Justin is really this upside capture slide so if you take a look at this chart what this is doing is you take the propensity for a factor to uh capture the upside of a market divided by the downside that it's capturing so you're seeing by it being a Above This Gray Line which is where you want to be that it tends to capture more upside with less downside across Market Cycles so you know that's just a high level of how of what quality investing means and kind of empirically what the benefits have been shown to be over Decades of time so I'm gonna pack it pass it back to Justin who's going to talk about how you want to identify these high quality companies yeah and that's a it's a great uh segue there and just a kind of summary sum what uh Luke was was saying um is and and it's really about that um Quality is actually safer so many people focus on dividends because they want lower volatility a lot of people buy low VA funds as well and they think that's safer um but if you go back to those charts you can see that actually quality has lower volatility than the quote unquote low Vol ETFs low v u indexes that are out there so if you are trying to be uh you're trying to invest in equities in in a safer way uh div focusing just on dividends is not the way to go focusing on quote unquote low VA is also not the way to go focusing on quality is the way to go and the big question is okay how do you do that how do you go about finding the quality names that are in the marketplace today now the first thing you want to look at is profitability now there are other metrics but I just picked kind of a three for both profitability as well as solvency and stability um but return invested Capital you could also use return Equity return invested Capital uh uses both the uh the cost of debt as well as Equity whereas return Equity is just Equity right so um you want that to be at least in the low teens probably higher and that is a good indication that it's a it's it's a very good business uh and it is a quality business okay you also want free cash flow and you want consistency of that cash flow it's just the total amount or what the current free cash flow yield is things like that it's okay what about the uh consist consistency of that over time do you have big dips are there periods in the past where the economy went South or uh just Dynamics in the industry went the wrong way and they had extended periods where uh their business was not producing positive free cash flow anymore now I think you you can throw out things like covid right that's kind of a oneoff uh thing 2020 a lot of companies did that so you can kind of get rid of th that those periods and that's why it takes some human element here to do the analysis is to look through periods like that but you generally want a consistent cash flow and same with margins operating margins are certainly uh something you want to focus on and you want it higher than the industry average every industry is going to be different you know so a lot of people want this catchall metric if I want it to be above X well that that's true uh that's helpful but it's not that helpful because every industry is different for example in the in the retail industry margins are very thin but they're turning over their inventory all the time and that produces uh you know nice size profits and nice size size return and Equity Etc over time if they are efficient and consistent with their business uh then when it comes to solvency and stability uh one of the main reasons that companies eliminate their dividends as Luke said they're not sacren they can be eliminated or but it's the fact that their balance sheet gets too stretched and very often you'll see companies that pay a high dividend and they cannot sustain that because either the business is flat or shrinking um and they're paying that dividend to leverage up their balance sheet and that's what you want to avoid you want to see operating cash flow ratio so that is the amount of uh cash flow from operations they are producing divided by the current liabilities you want that one or higher interest coverage ratio very similar but interest cost divided by um current earnings net income you want that two or higher and then uh sorry net income divided by the interest coverage excuse me or interest uh expenses uh Altman Z score that's a complicated one I'm not going to put the ratio up here um but it was a professor I believe I forget the university but um he came up with a a way to figure out whether a company is likely to go bankrupt in the next two years or not um and if it's greater than three there's a pretty low chance that that that's going to to happen so those are some good metrics to to look at to follow now every sector is different though and and if you look at a quality uh ETF Quality Index uh what you'll find is it's huddled around a handful of sectors typically technology uh mainly because software companies they didn't have high margins low debt um and their businesses tends to be consistent uh Health Care the same thing right a lot of Ip um and they're able to squeeze profits out of their customers who in many instances need their products um and then Industrials as well there's a lot of scale there that that's uh that helps them stay profitable consistently over time and so those are the sectors that have the most number of Quality Companies now it doesn't mean you just go and thow all your money in those three sectors uh because there are quality businesses in every sector it's just there's more abundant opportunities in in one versus the other some sectors that don't have a lot utilities real estate and materials uh utilities mainly because they have a lot of debt and their their profits are are legislated because they're they're regulated um so they tend to have relatively low profitability uh real estate uh a lot of debt typically and the materials they tend to be price takers and so they tend to have V varying levels of cash flows and uh earnings so um that's that's the quantitative side those are the numbers what is more challenging however because you can find those numbers in a lot of places is the qualitative aspect okay understanding the sources of what is called an economic modor or competitive advantage and this is what drives the numbers okay the qualitative side drives the numbers if the qualitative side is not holding up its end of the bargain the numbers will follow okay the numbers will follow in a negative way uh and vice versa so uh the first is intellectual property Disney's a good example right all of their uh media assets that they own uh scale so bigger companies can uh spread out their cost over a larger number of sales and that allows them to increase margins uh Walmart's a good example of that high cost of Entry so if it's a very difficult for someone else to come in and compete with you well you're able to charge higher prices now Boeing is a good example of that and that's why they've been have been terribly managed but they still been able to kind of hang in there because there's not a whole lot of competitors um and so uh it's pretty crazy that they they kind of messed that up because they were kind of in a nice sweet spot for for a long time and they focused on the wrong things and it goes back to what we'll talk about in a minute which is leadership uh switching costs so that is saying okay what are the costs of me moving from uh from one product to another one service to another and the iPhone's a perfect example of that if you have an iPhone you're in the ecosystem you have iCloud and all your data stored there and move that over to an Android phone uh a lot of people don't want to do that so uh that's what allows them to have a a good economic reme and then Network effects social media is a good example of this nobody's going to be on the social media platforms if everyone else isn't on it right they're the only ones same Payment Processing that's another one where if everyone has a Visa reader and a Visa card right that that that helps uh keep people in that Network and then what allows for that business stability over time did I lose my camera let's try to bring that back up there we go looks like I lost my camera okay so uh yeah business ability overtime and growth and that's really driven by leadership Microsoft's good exam example Sai nadela is one of the most underrated CEOs in the in in the world um and he's brought Microsoft back from you know the zoom era and and a lot of failures and really uh you know it's now one of the largest companies in the world and so that's great leadership whereas on the cor Larry Boeing you know has terrible leadership and they've been you know on a slide for many many years now even pre-co so uh leadership is vital and you need to make sure that they have a good solid leadership team uh that is has a vision and can execute uh cality is important you know this is utilities versus consumer discretionary utilities that they may have low profitability but their business is consistent um in a consumer discretionary could be great one year but if unemployment starts to rise suddenly people are going to spend less okay customer concentration this happens a lot in in the iPhone industry iPhone suppliers EXC excuse me uh about a decade ago a lot of them 80 90% of their revenue was just iPhone and if Apple decided to not use their chips or use their product in their phones that would could bankrupt the whole company so a lot of them went out and used that cash flow to reinvest and diversify their businesses it's not as bad as it used to be but you got to make sure that the co company does isn't just uh relyant on one particular customer um corporate governance is a great example so Tesla obviously very poor C corporate governance and I think that's uh one of the reasons why Tesla's uh currently in a long down slide and then what about the industry overall the growth competitiveness cars are I I say many times it's one of the worst industry to be in because it's so Capital intensive and it's very competitive um so you want to make sure that hey you want that that industry to be less competitive as opposed to more competitive because uh the more competitors you have the more you have to battle um and potentially cut your price and cut your maret margins and then industry growth you know obviously AI is growing right now but how sustainable is that uh in different parts of the AI space so make sure you understand that and then what are the risks to your technology changing Blackberry is a great example uh Blackberry was the leader uh right before the iPhone uh came out it had dominant market share 60 plus per of the I the the smartphone market and then the iPhone came along and they were you know they had single digital market share within a couple of years and then uh what about market share uh and and the niche that it's operating in so uh monster has been uh in the drink in the drink industry and the the the energy drink industry has been a monster for a long time um but that also means that they could lose market share just like Blackberry did and then what Niche are they are they dominating are they dominating Niche and and frankly I think some of the best businesses just simply focus on their niche they're the best ones at doing it so um and then lastly regulations so regulations can derail a company overnight uh obviously you go back to the 70s with maell uh but right now a good one is Li Nation you know they bought Ticket Master and there's a you know basically a monopolistic lawsuit that they are using their Market power in a monopolistic way and they're threatening to to reverse the merger of Ticket Master and kind of break up Live Nation and that is always important to to follow to make sure that whatever advantag is the company does have today that it will be sustained um because like I said once the qualitative part goes south the quantitative part will follow so make sure that you are focusing on that as well and you're analyzing each part of uh each one of these to see which ones are maybe uh I potential problem or which ones they have a you know huge leg up on and so um I wanted to uh really focus on that one because it's something most average person tends to overlook let's go into a case study we're we're going to look at qualcon vers AMD obviously AMD is very popular right now because of AI uh and you know it's kind of second to Nvidia and the uh in the U graphics card space and we know that those are important those gpus are important for AI but we're look looking at profitability with M and Qualcomm obviously both chip names in a little bit different space right qual dominant in the uh the wireless handset market and hand chip chipsets versus AMD more on the gpus and now obviously competing with Intel on the CPUs as well but if you look at profitability for a brief period in 2021 the blue line that's the amd's return on invested Capital that did Skyrocket well above 40% but it's back down to 2% which is where we were preco and for most of 2016 and 17 you can see that was actually in negative territory and same with the green line which is the operating margins that tends to follow right operating margins tend to follow overall profitability and that's now back down to two and a half% uh after peing in the 20s so um you can see AMD of the last decade it had some some brief periods where things were going really really well really that was only 2021 maybe parts of 2022 uh but most of the time it's a relatively low Prof whereas Qualcomm you're talking about return invest account capital in the low 20s and that's kind of where it's been averaging out over the past decade and that is very quality right and then looking at solvency okay you're looking at uh cash flow from operations divided by current liabilities and for Qualcomm that's about one and a half for AMD that's at about only 0.2% 02 okay and so it shows you that their cash flow from operations isn't really covering they're going to cover their current liabilities now they can borrow money they issue shares they can do things to to to solve this in the near term uh so it's not like they're going to go bankrupt and you can see that with Alman Z score Alman Z score for AMD is 15 and it's six for Qualcomm you say oh Qualcomm that's lower that's not as good yeah that's true but it's still well above three and so neither are in any Jeopardy of going bankrupt in the near term uh valuation wise this is where things get a little squarely and this is why a AI has gotten way ahead of itself and you can see here is Enterprise Value to free cash flow so this is total Equity value in the marketplace plus the debt on its balance sheet divided by its current cash flow from operations and AMD is trading out 169 times Qualcomm only 14 times 10 is AMD really worth 10 times uh the multiple as Qualcomm I really don't think so especially when you look at Cash s from operations AMD is is down 53% year-over-year whereas quc com's up 24% year-over year so you're growing faster you have you're trading at a lower valuation and your higher Prof this is why we own Qualcomm for clients and you know not AMD whereas if you're just focusing on the narrative you're focusing on AI then you're going to buy AMD but clearly uh qualcom is that the better name to to own especially in the longer term now what are the sources of their economic Moe now they both have an economic Moe to a degree but Qualcomm is really driven by their patents on 3G 4G 5G their R&D experience Etc they do have a lot of scale $36 billion in Revenue uh fairly low to moderate cost of Entry uh to get in and develop chips and try to compete um I I think that's that there's a lot of Chip companies out there and there there there's know how it's just a matter of you know can you fight the install base and that's that networking effect that uh Qualcomm has which is uh all the installed towers and current handsets that run on their technology and that doesn't look like that's changing anytime soon now there are switching costs um which are moderate which is you know to move from uh you know the iPhone or so Apple's been trying to move away from Qualcomm chips for a long time they've just been unable to uh really make them as as good as you know those modems as good as um as Qualcomm and then obviously they lost their lawsuit with Qualcomm a few years back so um really Qualcomm really has a uh a lock on uh the the wireless handset ship market for right now and they're trying to make inroads into the CPU Market Etc AMD however they're already in the CPU market right they have a license along with Intel on the x85 platform now there's the arm platform that's what Apple built their chipset on uh qualcomm's using the arm platform as well for their chipsets uh within their CPU it's called Snapdragon processors the AMD they've been using the x86 platform and that going back going to the bottom here which is the software that's built on the 8 86 platform creates a bit of a network effect but there are options like I said with arm uh there for their their microchips um so they also have some scale and they have some positives about them but clearly not as strong as Qualcomm okay and then you go down to the other aspects the qualitative other qualitative factors that's leadership both are good um cyclicality AMD more cyclical because they're focused more on computers and tied to capex cycle whereas most people whether the econom is good or bad if you need a new phone you're going to get a new phone either way uh Qualcomm does have a high customer concentration on Apple but that's because they sell chips for handsets and Apple has such a large market share about 20% of the revenue is tied to Apple that's something to worry about but like I said Apple's been trying for decades to for about a decade to uh to diversify away from Qualcomm they've just been unable to uh corporate governance amds chairman and CEO are one and the same the same person whereas Qualcomm they are separate we always like them to be separate because you want the chairman making sure that the CEO is uh in check and they're not doing things that are against the shareholder interests uh what else um yeah reg that's pretty much it I don't want to go too far into that but that's basically uh a case study uh on how to look at these different companies and compare what um an exciting name interesting name compared to a quality name and that's why longterm qualcom has been uh the winner although near-term AMD has been the winner so it just depends on what you're focused on you focused on just catching that trade yeah sure a AI a AMD might be the name but if you're looking to be an investor Qualcomm is certainly better now what tools can you use to find good quality names the first uh there's a few free ones trading view finis ro. a uh I've looked at those they're pretty good they're okay but and they're but they're free you get what you pay for right and you probably want to pay for something better uh morning start Market surge white CH those are all good Avenues to get better data uh they have uh search features and filter features you know stock filter features to kind of filter for some of these uh metrics that you want to find white definitely does um and some of the other ones have that as well another one to consider though is your broker uh you know to trade stocks nowadays it's free right there's no no trading costs no commissions but you know there are other aspects to having a broker uh that can be important so what tools does your broker have for you that can help you find good quality games and I think uh that's an underutilized uh place to look for um good data because you know good data in good data is very important to your investing process okay and then let's talk a little about valuations and dividends because valuations are very important okay growth expectations lead stocks lower if they disappoint and you typically get margin or multiple contraction whether it's price to sales price to free cash flow earnings per uh PE ratios Etc so you want to compare also the PEG ratio so PE divided by the growth across the industry so you want to look at something like that remember when you're comparing names you typically want to you typically want to look at Apples to Apples you don't want to be looking at a company in the tech industry compare with one in the industrial industry or the utility industry with the consumer uh discretionary industry right you want to be car comparing Apples to Apples um and the last thing on valuation is Quality Companies rarely tra trade cheap if you see a single digit p ratio there's a very good chance that is not a quality business there a very good chance it's not a quality business doesn't mean it's not it doesn't mean you know wholesale you can't uh paint the whole thing with the the same brush but you know just trying to find ones that have very low P ratios that's not a way to find Quality Companies okay and then when it comes to dividends as Luke said Dividends are not guaranteed you want to make sure the balance sheet strength is improving least steady not falling um and you want the cash div ratio below 80% so not just and this is basically dividing the cash flow of the business divided by its payouts uh and dividends so a lot of times what happens is there's not nearly enough cash flow to continue to pay that dividend and that's a sign that's going to eventually cut the dividend you also want to make sure their market share is steady and Rising you don't want it to be you know headed uh in in in the dumps and you want to make sure there's some growth there dividend growth is important uh and the dividend will only grow if the business is growing as well and the market share is staying relatively steady and then same with profitability right you want that to be steady consistent and Rising um and then uh you want to focus on companies that are less cyclical versus more cyclical and then once again dividend growth is is vital and I wanted to highlight this one Nas this is actually in the msci US Quality Index so it's a quality name however what you can see is that it has traded at pretty high uh valuations in the recent past just the end of 2022 this is trading at over2 $300 per share now we're at 126 and what happened was and you can see 2023 and this year 2024 earnings started to fall so when earnings go from growing dramatically as they were in 2020 and 2021 even 2022 70 80 90% the multiple is naturally going to be very high but too often too often the market extrapolates that growth too far into the future and the reality is much different and things uh kind of upend uh in this case the uh solar industry and that's why you've seen profits really reverse and this looks like it's probably headed lower so just because of the quality name because it checks all those boxes of good uh balance sheet as well as profitability Etc doesn't mean that it can't be trading at an overvalued price and this has gone once in down uh from over 300 h a low recently uh in the 70s so you can see it went down about 75% from its all-time high just because Mark overpriced uh the name now uh this is the overarching take though from this presentation and that is to have the right mindset and that is don't chase yield as I said at the top and Chase quality that's what you should be chasing you should be chasing quality business business because good businesses Drive returns not dividends just because it says 6% dividend yield on the screen does not mean that that is a good investment okay far more often the ones that are that are yielding one and a half two and a half three percent those are better businesses and they're tra and the reason they're not trading at a high multiples because you know they're still growing and the markets so not they're not trading at high yield is because they're still growing and they're trading at um Market multiple or a bit higher because they are a quality business okay so focus on good businesses not just dividends and valuations matter don't chase the fads you know looked at AMD obviously that's a fad right now but you much rather own a Qualcomm over an AMD and have a watch list be ready so just because you identify a company as high quality doesn't mean you have to go buy it today uh have a price Target where it might make sense based valuation uh to to um to buy it so that about does it for there we're going to get to a Q&A session here in a minute but I want to remind you that if you uh need a portfolio review uh we do these for free uh you can head over to our website uh click on the portfolio review button on the top right hand part of the screen and fill that out and we will get back to you and we will give you something that's similar to this where breaks down you know what uh sectors exposure you might have what your asset allocation is to various parts of the market uh what your risk level is uh Etc what your waiting are all of that so it's a very comprehensive portfolio review and typically we say you know we have strategies that might make sense for you uh if not no big deal um but really it's about trying to find a solution to your problems uh and sometimes that is I want more yield out of my portfolio I want better returns I want um less volatility uh or maybe I just don't know what I'm doing at all and I need help uh finding a strategy um so it kind of runs the gamut here and so I encourage everyone to take advantage of that you can send us a message through info@ kpf financial.com or once again heading over to our website or there's our uh our phone number a number uh as well as our physical address here in Irvine California so let's get to a Q&A uh session uh real quick let me go to here we go okay let's get to some questions here and I'll let um Luke maybe take some of these um Luke are you seeing any there that are of interest to you looks like you might be muted how does that go now can you hear me there we go okay so it looks like one was addressed to me which was on slide on the slide titled return by decade second row from the bottom third quintile what would be examples of businesses in the third quintile so it's diffult to give examples of businesses within the third Quintel because essentially what they are doing is they are sorting it by uh low to high dividend yield and just bucketing it 20% 20% so on and so forth till you get to the entire stretch of dividend yield so you know different uh companies regardless of what sector they in have decide upon different dividend yields based upon what their either their businesses uh can distribute or based upon what the market has now decided their dividend yield will be because of how consistent or good or in distress their business is so don't think about it in terms of their specific businesses that will always fit into these buckets the reason why we showed that is just to illustrate that simply reaching for the highest dividend yielding Securities empirically is not the best way to go about getting above market returns so there's there's an answer that I hope that's helpful in understanding what we were trying to show there uh see well let me uh let me show him this so basically the first quintile that's going to be probably companies that don't pay divid at all okay uh and the second quintile they may pay a little bit of dividend third quintile you know a little bit higher than that I would say if you're looking at a company this Charles Schwab 1.37% that's probably one that's in that second or third quintile um where it pays a dividend but it's not a giant dividend but you know Charles Schwab it's a it's it's a quality business uh if you look at the metrics and that's why you're not going to get this rarely this is rarely ever going to trade at a you know 6 7% PE ratio and if it does in this market that's a problem you know if you're looking at a company that's trading at a six s% p uh sorry six to 7% dividend yield I said p ratio dividend yield um you know that's probably more of a red flag especially if it's creeping closer to 10% okay so um just wanted to uh dive into that a little deeper uh Simon Says is ET a quality company in the energy sector let's pull that up okay so this is energy transfer energy transfer and this is a pipeline company pipeline company okay and I believe it is a yeah it's a limited partnership so first thing you have to understand about this name is that the dividend yield is also uh going to be taxed at your ordinary income tax rate so it's not a qualified dividend so when you see this 8% know that that's not really 8% it's not the same as an 8% that you get from qualified dividends because the qualified dividends can be taxed at either 0o 15 or 20% where this is going be taxed at whatever your income tax rate is could be 25 30 could be up to 50% if you're in a very high tax bracket in a high tax state so that's number one that you have to consider but when it comes to profitability look at return Equity seven or sorry return invested Capital only 7% the longer term average is only about 6% and then if you look at the debt inance balance sheet right you have $ 53 billion in long-term debt on a 52 billion market cap that looks like a leverage balance sheet with fairly low profitability would you call this quality Luke no no yeah I wouldn't call equality um any other ones that are yeah so this is actually one that I want to touch on so it says Justin and Luke great ideas on fundamental and technical analysis but why should I spend significant effort to go through an individual stock search and Analysis when 80% of the stocks do not beat the General Market Market why not just invest in the Spy DJI Etc and when I say 80% it's generally the 8020 rule so it's a great question so this is actually a great time to point this out you know I used to work for a company that did active mutual funds and this was the perfect example within the past couple weeks of how active management can be beneficial right so if you look at the GameStop situation and this happened back in 2021 and this happened a couple weeks ago that is to say that if you're indexing and I always say indexing is an excellent way to get exactly the market but empirically what the data tells us is you can do better now the ways people tend to go wrong when they're seeking to do better are having high turnover strategies they trade too frequently Sometimes the best trade is no trade but when you keep focused on long-term investing and go towards those names that empirically have done better than the overall Market you certainly can have positive returns relative to the market so why do I want to talk about what's happened recently well GameStop for example if you were invested in an passive fund let's take the Russell 2000 right where the GameStop would have a pretty significant weight given where its market cap was before the runup so when it starts to run up what happens to people who have invested in the Russell 2000 they hold it they hold it they continue to hold it and then because the it's now run down and there hasn't been the annual rebalance of that index you held it all the way throughout now an active managing fund or an active managing person can take advantage of things like that and get positive returns of individual specific names so yes generally speaking indexing is an excellent way to do it but empirically if you look at the data we've seen their ways tilting towards value Securities tilting towards more profitable or in this case Quality Companies can give you positive returns in excess of market returns but certainly it's a big Endeavor I mean we've shown you a lot of ways to look for these Quality Companies but it is certainly complex and a lot of people don't have time to do that and that's completely fine yeah and just going back to this slide right this is showing you right the market versus quality names you're getting lower volatility and you're getting better returns over extended period of times now in every uh year is that going to be the case no but over extended period of times of time when you can focus on the quality businesses you are going to get Superior returns and lower volatility you can see that here since 1990 the market had a volatility 15.3 quality 14.7 and a nearly 9% return versus 7.5 for the overall market and then if you go to here you know you can see here which is um how consistent that blue line is straight through the middle um and so you want to make sure that you're not just you know if you want to index that's fine if you don't want to go through this work that's fine um but you know if you want Superior returns with lower volatility then focusing on quality is the way to go and you know so many people are focused on income you know a lot of our clients a lot of pre-retirees and retirees are focused on income and you know the the yield on the S&P is what is it one and a half right now yeah something like that so you're not going to get income from that uh the requisite amount but you also as this presentation is showing is you don't want to reach as well you want to make sure that when you are looking for dividends that you are Focus focusing on the business first not on the dividends first so that the consistency of that income uh stays there or stays there over the long term yeah before we get to to the next question I do want to tackle two PSAs here uh for the audience which is one says from Laura says that morning star and value line can be free from your local library database section so that's important to note and the other was that it seems to that for Mark the handout is corrupt we're having someone look into it just to make sure that we can have it takeaway for you all to have from this from this webinar let me do this I think I can upload see if I can find it there we go let's see if that one works I just uploaded another handout and that should work let me make sure let me see if uh if that works for everybody okay um let's see what else says with dividend paying companies sorry with div paying companies do you put any weight on a company that raises dividend by a certain percentage over a long time frame are there certain metrics to look for or simply just consistency uh well yeah we we you want to see that going up over time one of the biggest red flags for a company is actually the dividend going up over a long period and then it going sideways okay uh and that's just saying okay well they had this history and this of raising a dividend x amount every single year and now it's suddenly just marching sideways that's the that's management saying hey this our business is not made for raising dividends every single year we can't continue to pay more and more year after year after a year um so I definitely want to see that consistency it doesn't have to be a lot I just want to see that it's going up uh over time what about you L uh sorry I'm trying to figure out this uh just trying to make sure this pamphlet Works got it okay um let's go to the next one and I'm trying to clean up the the list here uh it says per Morning Star since October the utility sector has increased 30% followed by the technology sector with artificial intelligence and the data centage will the Need for electricity grow exponentially on AI search requires 30 times the electricity yeah I mean it's something we talked about on air um that's certainly a growth driver um to for the utility industry uh because it's kind of like the healthcare industry healthcare industry is done very very well because Obamacare has allowed them to have a certain level of profit and they just raise prices and that's just more Revenue going towards healthare that's why our healthcare costs continue to balloon because there's a lot of perverse incentives there and same with the utility sector they can't force companies or they can't force individuals to use more electricity but when they go in there set up data centers they're going to need more electricity and they're going to earn their profit on on the higher demand so that's why utility stocks have done well as of late uh and there are other I actually think this is the more durable way to play AI uh is through utility sector and mainly the industrial sector and the companies that are selling products to improve and expand the electric grid so um yeah certainly something uh to watch in in a much better way to look at um look at the uh to try to find income and play AI overall yeah and I think it's important to note that it's yes utility businesses can be boring but I think what people don't realize as much is that some of the empirical data you see that drives higher expected returns can't necessarily be applied to REITs because they're different asset class real estate or utilities just because of the profit motive being different within utilities and the highly regulate nature of those utilities so it doesn't mean that finding quality utility businesses isn't a way to find outperforming utilities it just means that because of the nature of what is driving profitability within those companies and what is driving those businesses the empirical data doesn't necessarily match the conclusion that some people uh would would want to drive drive derive from it yeah uh Gary says dividend Aristocrats a good starting point I would say yes you know that's those are companies that have paid more and more each year uh year after year uh but once again it's you you don't want to do this catch all those it's a divid Aristocrat that's all I want to look at and vice versa uh you don't want to exclude a lot of great companies that maybe haven't been paying their dividend out for very long maybe they're relatively new and their in their big success and they've uh just started to pay out a dividend and that that wouldn't catch those names so make sure that you're not uh being too myopic in your search and you're focusing on the right data points not just some overarching list like uh dividend aristocrat uh let's see what else are you seeing any other ones Luke uh what are your favorite metrics to use to determine if a good company is fairly valued well you know actually uh one way for for Value I still like price the book some people don't think it uh adequately incorporates in tangibles I think generally it probably does um I actually like uh taking a look at the company's profitability relative to its asset value is a really good way to look at profitability so if a company's spending X am amount to acquire certain assets how is it utilizing those assets in terms of its profitability so its net income relative to the assets that it has acquired is an interesting way to look at things what about you Justin yeah I do think return on assets is uh pretty underrated uh mainly because return Equity employ also takes into account leverage of the business and and so I I like the I I think assets is a bit cleaner it's as Luke said you know what are assets and how much are they earning off of them and so I think that's a that's a pretty good one um on the profitability front and then uh you know from a a multiple perspective like I said before you want to look at the others within the industry and the growth of the company if the grow if the if if this is a secular grower it's growing 10 15 20% in its earnings every year and does has stability and durability of its business then that is going to require a higher multiple than the overall Market maret I'll I'll pay Enterprise Value to iida in the mid to high teens for something like that um but you know you're seeing companies right now if you look at you know I can just go we'll just go to AMD right since we were looking at that before um and you you'll be able to see that the multiples are just way way way out of whack just pull that up here there we go so you can see is it doesn't have a lot of you know pretty much no debt in its balance sheet that's great um but its price to sales ratio is 10 times okay that actually 11 times that's anytime you're paying over 10 times price of sales that's very rarely going to work out for you very rarely and their Enterprise Value is 61 that is Extreme extremely high so once again it's it's you have to compare it to its industry and you have to compare it to its growth potential going forward yeah just to add on because the the question about using value metrics for technology for example would it uh could you be underwe in technology you could certainly be underweight in technology but I think that's why it's important when you're building a holistic portfolio to have certain guidelines right so maybe you want to take a look at what the market weights technology as and you don't want to be more than 10% underweight or overweight any given sector and that's a risk mitigation technique because again it's not that every period these things are going to have performance over the long term you expect to have lower volatility and higher expected returns but just as another Safeguard against uh you know not being under Diversified or not getting access to you know every part of the market that you should be it's good to have BS over which you're comfortable being overweight or underweight any individual sector yeah and Timothy asks what deal breakers if any do you have that classified company as being uninvestable um number one for me is the balance sheet if there's especially in this environment where inates are headed higher uh a lot of these companies borrowed money and locked in locked in rates at at a time when Capital was very cheap that's changing and so if over time their cost of their interest costs are going to go up and they're unable to pay down that debt on a consistent basis because they don't have the cash flow that's kind of a deal breaker to me I want I want a company that isn't going to be focusing on deleveraging their balance sheet I want a company that's focused on how do I take the cash flow we're producing today and re investing it to grow the business to maintain the business Etc not to just simply maint stay in business you know when you're focused just on staying in business uh odds are good that you're not going to um so that's kind of a deal breaker for me do you have any uh Luke yeah I think Leverage is important like you said I think how much debt you have on your balance sheet is important uh because you want to take a look at a company as okay if there's a turbulent time for its business is it able to pay its debts that's certainly an important aspect of it another is does the company want something that Steve would say all the time doesn't make money don't invest in businesses that are not profitable which over the past decade would have been fine because debt was really really cheap but we live in a different environment now so I think now more than ever it's important to tilt towards companies that actually make money yeah all right well I think we're coming up on the hour I think this was good we got to a lot of uh great questions hopefully gave you some clarity on why chasing dividends is not what you want to be doing that focusing on the Quality Companies is is truly how to invest to outperform not just the other dividend payers but really the overall Market um and especially get return good Returns on a on a risk adjusted basis too many people focus on just the total return not on that volatility and Quality Companies give you both that's the best of both worlds better returns lower volatility and that is frankly that's the Holy Grail of investing that's really what you want um and so uh hopefully this gave you some insights on how to think about that and execute that on your own if you need help if you do not understand how to do this on a consistent basis for your portfolios I encourage you to reach out to myself or Luke at our company KP Financial all you have to do is I'll go to our website right now and I'll show you it's very simple just click on the portfolio view button right here and fill this out and we'll get back to you set up a call and then we can uh go from there so I appreciate you all tuning in and uh look forward to our our next invest Tech wealth webinar and talking to you on air very soon have a wonderful afternoon thank you all

uh to either buy back their stock they pay a dividend or they take that money and they reinvest it in their business typically um now some of them pay out debt sure but most of them are doing those first three things um and that It ultimately uh drives economic growth so you know while there&#39;s there&#39;s unlikely to be a recession this year you could even see uh economic the economy really accelerating uh into next year but a lot will depend on that fed policy and financial conditions room remaining relatively easy on the retail sales front the consumer is strong you see uh this 2021 2022 era that&#39;s when everyone was at home and they were getting checks and they simply were uh they were spending it uh a lot on physical goods and that&#39;s typically what this retail sales number is telling you and then they stopped because they had plenty uh they had plenty and they uh you know there&#39;s kind of a mean reversion and then some and now we&#39;re back to kind of where we were preo you can see this at about 5% year-over-year uh and the retail sales number we a bit higher than that for now so the the consumer overall is relatively strong because of high uh asset prices both on the real estate front and the stock front and then uh the real pain though is in the the lower desile of um of income uh in in income producers and they are struggling you see that&#39;s why you see dollar storees struggling it&#39;s starting to creep up into more of the middle income as well but overall retail sales remain relatively robust there&#39;s always going to be pockets of weakness in every single economy so that doesn&#39;t mean that everything&#39;s going to hell in a hand basket just means you have to be cognizant of where that strength and the weakness is now that&#39;s the overview of the uh broader economy and markets right now but I&#39;ll let loot take over and start uh really digging into what is most important is how to think about uh investing in the right way as opposed to just chasing that yield so I&#39;ll let you take it over Luke thanks Justin yeah in order to set the scene before you can talk about how you can really identify these companies we want to talk first about what quality investing really means so this next slide really shows kind of a five bullet point summary on what quality investing really is Justin if you want to go to this next what is quality investing Slide the first being you want to focus on companies with strong fundamentals long-term stability and reliability so it&#39;s what we talk about all the time on the show and all the time with our clients is we want companies that are robust to various economic Cycles companies that have very strong balance sheet so we really first put an emphasis on har on high profitability metrics like return on Equity return on invested capital and again those solid balance sheets another thing that you want to keep in mind is you want companies that have a pretty sustainable competitive Advantage so if you have a company where they&#39;re in a product line that&#39;s really easy to duplicate or improve upon or really just beat on price these aren&#39;t the type of companies we&#39;re talking about we&#39;re talking about quality firms that will help you out perform in economic downturns we&#39;ll show some data a little bit later on on how Quality Companies tend to perform in different economic cycles and with all these things in mind these companies tend to provide these Superior risk adjusted returns so this next slide really shows four different companies uh examples of companies company a b c and d and so each description which we do have a handout for this uh for this presentation so you can take a look back at this later this just gives you an example of different you know these companies aren&#39;t in any individ ual sector they can be in different sectors but they all have these things that are in common so company a a tech firm has consistently High profit margins it&#39;s been increasing its market share in the cloud computing sector it has a robust balance sheet very little debt High return on invested Capital that would be an example of a company that is a strong quality company now we talk about all the time how boring businesses can be good businesses so you look at company D which could be a boring business an automat automotive manufacturer they struggle they have declining sales their profitability is declining as well and they sff competition this would not be within that category of what we consider to be Quality Companies so really the question then becomes as you see on this next slide how do dividends fit into this picture well first let&#39;s define a dividend a dividend is a a portion of company&#39;s earnings it&#39;s distributed to shareholders and typically that happens in regular you know quarterly or annual intervals and so it&#39;s really return of investor capital in a way and so looking at this chart which shows the power of dividends and compounding what you see here is the difference between the S&amp;P 500&#39;s return with dividends so that&#39;s reinvesting those dividends and that&#39;s the blue portion of the chart and the green the gray is the S&amp;P 500 index&#39;s price return so not thinking about those dividends at all so what you want to frame your mind towards when you&#39;re thinking about total return is that total return is your price return plus your distributions right those dividends that are coming in so dividends as a whole are certainly a large portion of the total return of this index in all indices looking back historically this going from 1960 until 2023 but it&#39;s also important to note that Dividends are an important piece of this but as we always say you shouldn&#39;t Chase yield you shouldn&#39;t Chase dividends it&#39;s just one part of the equation and so if you take a look at this next slide this is a very interesting chart for me because what this does is it essentially splits up the S&amp;P 500&#39;s return which you just saw on the previous slide into different decades and then splits that up again into different quintiles meaning that each bucket has 20% of the S&amp;P 500 so the first quintile represented by that second column is going to be the lowest dividend payers and the fifth quintile on the far right is going to be the highest dividend payers so what do you notice let&#39;s take a look at a complete decade so 2010 to 2019 that second row from the bottom what you see is as you move closer to the right further to the right away from the low dividend payers to the high higher dividend payers you do see a higher return the first quintile return just under 133% then that moves on to 13.25 and then 14.15 the third quintile but then it goes down and so that&#39;s because historically and you see this in most time periods actually right here is if you reach for those companies that are paying the higher dividends the fifth quintile the highest 20% of dividend payers you actually get a lower return then sometimes the overall market index like you saw in the decade starting in 20 10 and ending in 2019 but certainly then those uh certainly lower than the third and fourth quintile in a lot of these periods so that&#39;s to say that you shouldn&#39;t be reaching for the highest dividend payers what you should be focusing on is consistent dividend payers people who are able to grow their businesses so why might this be the case well here&#39;s a couple reasons on this next Slide the first is that Dividends are not guaranteed companies can reduce or even eliminate dividend payments and you see that all the time another reason is that high dividends can mask problems why might the dividend yield be high well it could be high because the company decided to pay out a large dividend relative to their share price but the equation works both ways it could be the case that the company&#39;s share price is falling indicating uh stress that the market has seen indicating an inability to pay its debt or excessive uh uh um or declining revenues which again jeopardize those future returns another is that you could be overlooking growth potential so on that previous chart what you saw is in the decade starting in 2010 you saw that the lowest quintile actually was outperforming and that&#39;s because post 2000 you see a lot of tech companies a lot of large companies today that pay very small dividends or they don&#39;t pay any dividend at all so just focusing primarily on who is paying a dividend means you may Overlook companies that don&#39;t pay a dividend but have excellent growth potential and that&#39;s why this next slide is really highlighting the five things on why consistency is key and what you should really be looking for one is steady earnings so those consistent profits that support those reliable compounding of returns those reliable dividend distributions second is Financial Health you want those strong balance sheets third dividend increases is what you should be looking for you want a company that can not only consistently pay its dividend but consistently grow its dividend next you should be looking for Quality firms that can maintain performance during those downturns and have that long-term Focus that&#39;s for strategic planning that prioritizes sustainable growth so these next two charts are really interesting to me really these next three charts next one is shows the outperformance of uh of quality which is what we&#39;re calling it high quality companies uh and it does that with lower volatility so the time period here is from 1990 until 2020 and you see each line represents a different bucket the gry line is the market overall and the bottom 50% of Quality Companies so the least Quality Companies are going to be that kind of turquoise line and the highquality companies are the dark blue line and you see it&#39;s very clear from the chart that the quality companies are outperforming in terms of a price return but if you look at that annualized return again showing pretty clearly that high quality companies are outperforming what&#39;s also interesting is that they&#39;re doing so with lower volatility so lower variability of returns year-over-year so that volatility is actually 14.7% pretty significantly lower than those lowquality companies and it&#39;s having a return more like the market the beta is about 094 over this time period And so just to illustrate that again graphically this next slide is showing how that ride is a lot more smooth so don&#39;t get muddled down by all these lines that are going on here I want you to really key in on that dark blue line and you&#39;ll see that as the other lines are oscillating all over the place size value low volatility just different factors over which you can sort the market even high dividend the Blue Line the quality line is offering you a far more smooth ride it&#39;s outperforming as you can see in that chart below that graph quality is outperforming 88% of the time more than any other Factor its best outperformance may only be 3.1% but really look at that worst underperformance only minus 1.5% over that entire time period this is about having again better risk adjusted returns and a more smooth investment experience and just one more illustration of this before I pass it back to Justin is really this upside capture slide so if you take a look at this chart what this is doing is you take the propensity for a factor to uh capture the upside of a market divided by the downside that it&#39;s capturing so you&#39;re seeing by it being a Above This Gray Line which is where you want to be that it tends to capture more upside with less downside across Market Cycles so you know that&#39;s just a high level of how of what quality investing means and kind of empirically what the benefits have been shown to be over Decades of time so I&#39;m gonna pack it pass it back to Justin who&#39;s going to talk about how you want to identify these high quality companies yeah and that&#39;s a it&#39;s a great uh segue there and just a kind of summary sum what uh Luke was was saying um is and and it&#39;s really about that um Quality is actually safer so many people focus on dividends because they want lower volatility a lot of people buy low VA funds as well and they think that&#39;s safer um but if you go back to those charts you can see that actually quality has lower volatility than the quote unquote low Vol ETFs low v u indexes that are out there so if you are trying to be uh you&#39;re trying to invest in equities in in a safer way uh div focusing just on dividends is not the way to go focusing on quote unquote low VA is also not the way to go focusing on quality is the way to go and the big question is okay how do you do that how do you go about finding the quality names that are in the marketplace today now the first thing you want to look at is profitability now there are other metrics but I just picked kind of a three for both profitability as well as solvency and stability um but return invested Capital you could also use return Equity return invested Capital uh uses both the uh the cost of debt as well as Equity whereas return Equity is just Equity right so um you want that to be at least in the low teens probably higher and that is a good indication that it&#39;s a it&#39;s it&#39;s a very good business uh and it is a quality business okay you also want free cash flow and you want consistency of that cash flow it&#39;s just the total amount or what the current free cash flow yield is things like that it&#39;s okay what about the uh consist consistency of that over time do you have big dips are there periods in the past where the economy went South or uh just Dynamics in the industry went the wrong way and they had extended periods where uh their business was not producing positive free cash flow anymore now I think you you can throw out things like covid right that&#39;s kind of a oneoff uh thing 2020 a lot of companies did that so you can kind of get rid of th that those periods and that&#39;s why it takes some human element here to do the analysis is to look through periods like that but you generally want a consistent cash flow and same with margins operating margins are certainly uh something you want to focus on and you want it higher than the industry average every industry is going to be different you know so a lot of people want this catchall metric if I want it to be above X well that that&#39;s true uh that&#39;s helpful but it&#39;s not that helpful because every industry is different for example in the in the retail industry margins are very thin but they&#39;re turning over their inventory all the time and that produces uh you know nice size profits and nice size size return and Equity Etc over time if they are efficient and consistent with their business uh then when it comes to solvency and stability uh one of the main reasons that companies eliminate their dividends as Luke said they&#39;re not sacren they can be eliminated or but it&#39;s the fact that their balance sheet gets too stretched and very often you&#39;ll see companies that pay a high dividend and they cannot sustain that because either the business is flat or shrinking um and they&#39;re paying that dividend to leverage up their balance sheet and that&#39;s what you want to avoid you want to see operating cash flow ratio so that is the amount of uh cash flow from operations they are producing divided by the current liabilities you want that one or higher interest coverage ratio very similar but interest cost divided by um current earnings net income you want that two or higher and then uh sorry net income divided by the interest coverage excuse me or interest uh expenses uh Altman Z score that&#39;s a complicated one I&#39;m not going to put the ratio up here um but it was a professor I believe I forget the university but um he came up with a a way to figure out whether a company is likely to go bankrupt in the next two years or not um and if it&#39;s greater than three there&#39;s a pretty low chance that that that&#39;s going to to happen so those are some good metrics to to look at to follow now every sector is different though and and if you look at a quality uh ETF Quality Index uh what you&#39;ll find is it&#39;s huddled around a handful of sectors typically technology uh mainly because software companies they didn&#39;t have high margins low debt um and their businesses tends to be consistent uh Health Care the same thing right a lot of Ip um and they&#39;re able to squeeze profits out of their customers who in many instances need their products um and then Industrials as well there&#39;s a lot of scale there that that&#39;s uh that helps them stay profitable consistently over time and so those are the sectors that have the most number of Quality Companies now it doesn&#39;t mean you just go and thow all your money in those three sectors uh because there are quality businesses in every sector it&#39;s just there&#39;s more abundant opportunities in in one versus the other some sectors that don&#39;t have a lot utilities real estate and materials uh utilities mainly because they have a lot of debt and their their profits are are legislated because they&#39;re they&#39;re regulated um so they tend to have relatively low profitability uh real estate uh a lot of debt typically and the materials they tend to be price takers and so they tend to have V varying levels of cash flows and uh earnings so um that&#39;s that&#39;s the quantitative side those are the numbers what is more challenging however because you can find those numbers in a lot of places is the qualitative aspect okay understanding the sources of what is called an economic modor or competitive advantage and this is what drives the numbers okay the qualitative side drives the numbers if the qualitative side is not holding up its end of the bargain the numbers will follow okay the numbers will follow in a negative way uh and vice versa so uh the first is intellectual property Disney&#39;s a good example right all of their uh media assets that they own uh scale so bigger companies can uh spread out their cost over a larger number of sales and that allows them to increase margins uh Walmart&#39;s a good example of that high cost of Entry so if it&#39;s a very difficult for someone else to come in and compete with you well you&#39;re able to charge higher prices now Boeing is a good example of that and that&#39;s why they&#39;ve been have been terribly managed but they still been able to kind of hang in there because there&#39;s not a whole lot of competitors um and so uh it&#39;s pretty crazy that they they kind of messed that up because they were kind of in a nice sweet spot for for a long time and they focused on the wrong things and it goes back to what we&#39;ll talk about in a minute which is leadership uh switching costs so that is saying okay what are the costs of me moving from uh from one product to another one service to another and the iPhone&#39;s a perfect example of that if you have an iPhone you&#39;re in the ecosystem you have iCloud and all your data stored there and move that over to an Android phone uh a lot of people don&#39;t want to do that so uh that&#39;s what allows them to have a a good economic reme and then Network effects social media is a good example of this nobody&#39;s going to be on the social media platforms if everyone else isn&#39;t on it right they&#39;re the only ones same Payment Processing that&#39;s another one where if everyone has a Visa reader and a Visa card right that that that helps uh keep people in that Network and then what allows for that business stability over time did I lose my camera let&#39;s try to bring that back up there we go looks like I lost my camera okay so uh yeah business ability overtime and growth and that&#39;s really driven by leadership Microsoft&#39;s good exam example Sai nadela is one of the most underrated CEOs in the in in the world um and he&#39;s brought Microsoft back from you know the zoom era and and a lot of failures and really uh you know it&#39;s now one of the largest companies in the world and so that&#39;s great leadership whereas on the cor Larry Boeing you know has terrible leadership and they&#39;ve been you know on a slide for many many years now even pre-co so uh leadership is vital and you need to make sure that they have a good solid leadership team uh that is has a vision and can execute uh cality is important you know this is utilities versus consumer discretionary utilities that they may have low profitability but their business is consistent um in a consumer discretionary could be great one year but if unemployment starts to rise suddenly people are going to spend less okay customer concentration this happens a lot in in the iPhone industry iPhone suppliers EXC excuse me uh about a decade ago a lot of them 80 90% of their revenue was just iPhone and if Apple decided to not use their chips or use their product in their phones that would could bankrupt the whole company so a lot of them went out and used that cash flow to reinvest and diversify their businesses it&#39;s not as bad as it used to be but you got to make sure that the co company does isn&#39;t just uh relyant on one particular customer um corporate governance is a great example so Tesla obviously very poor C corporate governance and I think that&#39;s uh one of the reasons why Tesla&#39;s uh currently in a long down slide and then what about the industry overall the growth competitiveness cars are I I say many times it&#39;s one of the worst industry to be in because it&#39;s so Capital intensive and it&#39;s very competitive um so you want to make sure that hey you want that that industry to be less competitive as opposed to more competitive because uh the more competitors you have the more you have to battle um and potentially cut your price and cut your maret margins and then industry growth you know obviously AI is growing right now but how sustainable is that uh in different parts of the AI space so make sure you understand that and then what are the risks to your technology changing Blackberry is a great example uh Blackberry was the leader uh right before the iPhone uh came out it had dominant market share 60 plus per of the I the the smartphone market and then the iPhone came along and they were you know they had single digital market share within a couple of years and then uh what about market share uh and and the niche that it&#39;s operating in so uh monster has been uh in the drink in the drink industry and the the the energy drink industry has been a monster for a long time um but that also means that they could lose market share just like Blackberry did and then what Niche are they are they dominating are they dominating Niche and and frankly I think some of the best businesses just simply focus on their niche they&#39;re the best ones at doing it so um and then lastly regulations so regulations can derail a company overnight uh obviously you go back to the 70s with maell uh but right now a good one is Li Nation you know they bought Ticket Master and there&#39;s a you know basically a monopolistic lawsuit that they are using their Market power in a monopolistic way and they&#39;re threatening to to reverse the merger of Ticket Master and kind of break up Live Nation and that is always important to to follow to make sure that whatever advantag is the company does have today that it will be sustained um because like I said once the qualitative part goes south the quantitative part will follow so make sure that you are focusing on that as well and you&#39;re analyzing each part of uh each one of these to see which ones are maybe uh I potential problem or which ones they have a you know huge leg up on and so um I wanted to uh really focus on that one because it&#39;s something most average person tends to overlook let&#39;s go into a case study we&#39;re we&#39;re going to look at qualcon vers AMD obviously AMD is very popular right now because of AI uh and you know it&#39;s kind of second to Nvidia and the uh in the U graphics card space and we know that those are important those gpus are important for AI but we&#39;re look looking at profitability with M and Qualcomm obviously both chip names in a little bit different space right qual dominant in the uh the wireless handset market and hand chip chipsets versus AMD more on the gpus and now obviously competing with Intel on the CPUs as well but if you look at profitability for a brief period in 2021 the blue line that&#39;s the amd&#39;s return on invested Capital that did Skyrocket well above 40% but it&#39;s back down to 2% which is where we were preco and for most of 2016 and 17 you can see that was actually in negative territory and same with the green line which is the operating margins that tends to follow right operating margins tend to follow overall profitability and that&#39;s now back down to two and a half% uh after peing in the 20s so um you can see AMD of the last decade it had some some brief periods where things were going really really well really that was only 2021 maybe parts of 2022 uh but most of the time it&#39;s a relatively low Prof whereas Qualcomm you&#39;re talking about return invest account capital in the low 20s and that&#39;s kind of where it&#39;s been averaging out over the past decade and that is very quality right and then looking at solvency okay you&#39;re looking at uh cash flow from operations divided by current liabilities and for Qualcomm that&#39;s about one and a half for AMD that&#39;s at about only 0.2% 02 okay and so it shows you that their cash flow from operations isn&#39;t really covering they&#39;re going to cover their current liabilities now they can borrow money they issue shares they can do things to to to solve this in the near term uh so it&#39;s not like they&#39;re going to go bankrupt and you can see that with Alman Z score Alman Z score for AMD is 15 and it&#39;s six for Qualcomm you say oh Qualcomm that&#39;s lower that&#39;s not as good yeah that&#39;s true but it&#39;s still well above three and so neither are in any Jeopardy of going bankrupt in the near term uh valuation wise this is where things get a little squarely and this is why a AI has gotten way ahead of itself and you can see here is Enterprise Value to free cash flow so this is total Equity value in the marketplace plus the debt on its balance sheet divided by its current cash flow from operations and AMD is trading out 169 times Qualcomm only 14 times 10 is AMD really worth 10 times uh the multiple as Qualcomm I really don&#39;t think so especially when you look at Cash s from operations AMD is is down 53% year-over-year whereas quc com&#39;s up 24% year-over year so you&#39;re growing faster you have you&#39;re trading at a lower valuation and your higher Prof this is why we own Qualcomm for clients and you know not AMD whereas if you&#39;re just focusing on the narrative you&#39;re focusing on AI then you&#39;re going to buy AMD but clearly uh qualcom is that the better name to to own especially in the longer term now what are the sources of their economic Moe now they both have an economic Moe to a degree but Qualcomm is really driven by their patents on 3G 4G 5G their R&amp;D experience Etc they do have a lot of scale $36 billion in Revenue uh fairly low to moderate cost of Entry uh to get in and develop chips and try to compete um I I think that&#39;s that there&#39;s a lot of Chip companies out there and there there there&#39;s know how it&#39;s just a matter of you know can you fight the install base and that&#39;s that networking effect that uh Qualcomm has which is uh all the installed towers and current handsets that run on their technology and that doesn&#39;t look like that&#39;s changing anytime soon now there are switching costs um which are moderate which is you know to move from uh you know the iPhone or so Apple&#39;s been trying to move away from Qualcomm chips for a long time they&#39;ve just been unable to uh really make them as as good as you know those modems as good as um as Qualcomm and then obviously they lost their lawsuit with Qualcomm a few years back so um really Qualcomm really has a uh a lock on uh the the wireless handset ship market for right now and they&#39;re trying to make inroads into the CPU Market Etc AMD however they&#39;re already in the CPU market right they have a license along with Intel on the x85 platform now there&#39;s the arm platform that&#39;s what Apple built their chipset on uh qualcomm&#39;s using the arm platform as well for their chipsets uh within their CPU it&#39;s called Snapdragon processors the AMD they&#39;ve been using the x86 platform and that going back going to the bottom here which is the software that&#39;s built on the 8 86 platform creates a bit of a network effect but there are options like I said with arm uh there for their their microchips um so they also have some scale and they have some positives about them but clearly not as strong as Qualcomm okay and then you go down to the other aspects the qualitative other qualitative factors that&#39;s leadership both are good um cyclicality AMD more cyclical because they&#39;re focused more on computers and tied to capex cycle whereas most people whether the econom is good or bad if you need a new phone you&#39;re going to get a new phone either way uh Qualcomm does have a high customer concentration on Apple but that&#39;s because they sell chips for handsets and Apple has such a large market share about 20% of the revenue is tied to Apple that&#39;s something to worry about but like I said Apple&#39;s been trying for decades to for about a decade to uh to diversify away from Qualcomm they&#39;ve just been unable to uh corporate governance amds chairman and CEO are one and the same the same person whereas Qualcomm they are separate we always like them to be separate because you want the chairman making sure that the CEO is uh in check and they&#39;re not doing things that are against the shareholder interests uh what else um yeah reg that&#39;s pretty much it I don&#39;t want to go too far into that but that&#39;s basically uh a case study uh on how to look at these different companies and compare what um an exciting name interesting name compared to a quality name and that&#39;s why longterm qualcom has been uh the winner although near-term AMD has been the winner so it just depends on what you&#39;re focused on you focused on just catching that trade yeah sure a AI a AMD might be the name but if you&#39;re looking to be an investor Qualcomm is certainly better now what tools can you use to find good quality names the first uh there&#39;s a few free ones trading view finis ro. a uh I&#39;ve looked at those they&#39;re pretty good they&#39;re okay but and they&#39;re but they&#39;re free you get what you pay for right and you probably want to pay for something better uh morning start Market surge white CH those are all good Avenues to get better data uh they have uh search features and filter features you know stock filter features to kind of filter for some of these uh metrics that you want to find white definitely does um and some of the other ones have that as well another one to consider though is your broker uh you know to trade stocks nowadays it&#39;s free right there&#39;s no no trading costs no commissions but you know there are other aspects to having a broker uh that can be important so what tools does your broker have for you that can help you find good quality games and I think uh that&#39;s an underutilized uh place to look for um good data because you know good data in good data is very important to your investing process okay and then let&#39;s talk a little about valuations and dividends because valuations are very important okay growth expectations lead stocks lower if they disappoint and you typically get margin or multiple contraction whether it&#39;s price to sales price to free cash flow earnings per uh PE ratios Etc so you want to compare also the PEG ratio so PE divided by the growth across the industry so you want to look at something like that remember when you&#39;re comparing names you typically want to you typically want to look at Apples to Apples you don&#39;t want to be looking at a company in the tech industry compare with one in the industrial industry or the utility industry with the consumer uh discretionary industry right you want to be car comparing Apples to Apples um and the last thing on valuation is Quality Companies rarely tra trade cheap if you see a single digit p ratio there&#39;s a very good chance that is not a quality business there a very good chance it&#39;s not a quality business doesn&#39;t mean it&#39;s not it doesn&#39;t mean you know wholesale you can&#39;t uh paint the whole thing with the the same brush but you know just trying to find ones that have very low P ratios that&#39;s not a way to find Quality Companies okay and then when it comes to dividends as Luke said Dividends are not guaranteed you want to make sure the balance sheet strength is improving least steady not falling um and you want the cash div ratio below 80% so not just and this is basically dividing the cash flow of the business divided by its payouts uh and dividends so a lot of times what happens is there&#39;s not nearly enough cash flow to continue to pay that dividend and that&#39;s a sign that&#39;s going to eventually cut the dividend you also want to make sure their market share is steady and Rising you don&#39;t want it to be you know headed uh in in in the dumps and you want to make sure there&#39;s some growth there dividend growth is important uh and the dividend will only grow if the business is growing as well and the market share is staying relatively steady and then same with profitability right you want that to be steady consistent and Rising um and then uh you want to focus on companies that are less cyclical versus more cyclical and then once again dividend growth is is vital and I wanted to highlight this one Nas this is actually in the msci US Quality Index so it&#39;s a quality name however what you can see is that it has traded at pretty high uh valuations in the recent past just the end of 2022 this is trading at over2 $300 per share now we&#39;re at 126 and what happened was and you can see 2023 and this year 2024 earnings started to fall so when earnings go from growing dramatically as they were in 2020 and 2021 even 2022 70 80 90% the multiple is naturally going to be very high but too often too often the market extrapolates that growth too far into the future and the reality is much different and things uh kind of upend uh in this case the uh solar industry and that&#39;s why you&#39;ve seen profits really reverse and this looks like it&#39;s probably headed lower so just because of the quality name because it checks all those boxes of good uh balance sheet as well as profitability Etc doesn&#39;t mean that it can&#39;t be trading at an overvalued price and this has gone once in down uh from over 300 h a low recently uh in the 70s so you can see it went down about 75% from its all-time high just because Mark overpriced uh the name now uh this is the overarching take though from this presentation and that is to have the right mindset and that is don&#39;t chase yield as I said at the top and Chase quality that&#39;s what you should be chasing you should be chasing quality business business because good businesses Drive returns not dividends just because it says 6% dividend yield on the screen does not mean that that is a good investment okay far more often the ones that are that are yielding one and a half two and a half three percent those are better businesses and they&#39;re tra and the reason they&#39;re not trading at a high multiples because you know they&#39;re still growing and the markets so not they&#39;re not trading at high yield is because they&#39;re still growing and they&#39;re trading at um Market multiple or a bit higher because they are a quality business okay so focus on good businesses not just dividends and valuations matter don&#39;t chase the fads you know looked at AMD obviously that&#39;s a fad right now but you much rather own a Qualcomm over an AMD and have a watch list be ready so just because you identify a company as high quality doesn&#39;t mean you have to go buy it today uh have a price Target where it might make sense based valuation uh to to um to buy it so that about does it for there we&#39;re going to get to a Q&amp;A session here in a minute but I want to remind you that if you uh need a portfolio review uh we do these for free uh you can head over to our website uh click on the portfolio review button on the top right hand part of the screen and fill that out and we will get back to you and we will give you something that&#39;s similar to this where breaks down you know what uh sectors exposure you might have what your asset allocation is to various parts of the market uh what your risk level is uh Etc what your waiting are all of that so it&#39;s a very comprehensive portfolio review and typically we say you know we have strategies that might make sense for you uh if not no big deal um but really it&#39;s about trying to find a solution to your problems uh and sometimes that is I want more yield out of my portfolio I want better returns I want um less volatility uh or maybe I just don&#39;t know what I&#39;m doing at all and I need help uh finding a strategy um so it kind of runs the gamut here and so I encourage everyone to take advantage of that you can send us a message through info@ kpf financial.com or once again heading over to our website or there&#39;s our uh our phone number a number uh as well as our physical address here in Irvine California so let&#39;s get to a Q&amp;A uh session uh real quick let me go to here we go okay let&#39;s get to some questions here and I&#39;ll let um Luke maybe take some of these um Luke are you seeing any there that are of interest to you looks like you might be muted how does that go now can you hear me there we go okay so it looks like one was addressed to me which was on slide on the slide titled return by decade second row from the bottom third quintile what would be examples of businesses in the third quintile so it&#39;s diffult to give examples of businesses within the third Quintel because essentially what they are doing is they are sorting it by uh low to high dividend yield and just bucketing it 20% 20% so on and so forth till you get to the entire stretch of dividend yield so you know different uh companies regardless of what sector they in have decide upon different dividend yields based upon what their either their businesses uh can distribute or based upon what the market has now decided their dividend yield will be because of how consistent or good or in distress their business is so don&#39;t think about it in terms of their specific businesses that will always fit into these buckets the reason why we showed that is just to illustrate that simply reaching for the highest dividend yielding Securities empirically is not the best way to go about getting above market returns so there&#39;s there&#39;s an answer that I hope that&#39;s helpful in understanding what we were trying to show there uh see well let me uh let me show him this so basically the first quintile that&#39;s going to be probably companies that don&#39;t pay divid at all okay uh and the second quintile they may pay a little bit of dividend third quintile you know a little bit higher than that I would say if you&#39;re looking at a company this Charles Schwab 1.37% that&#39;s probably one that&#39;s in that second or third quintile um where it pays a dividend but it&#39;s not a giant dividend but you know Charles Schwab it&#39;s a it&#39;s it&#39;s a quality business uh if you look at the metrics and that&#39;s why you&#39;re not going to get this rarely this is rarely ever going to trade at a you know 6 7% PE ratio and if it does in this market that&#39;s a problem you know if you&#39;re looking at a company that&#39;s trading at a six s% p uh sorry six to 7% dividend yield I said p ratio dividend yield um you know that&#39;s probably more of a red flag especially if it&#39;s creeping closer to 10% okay so um just wanted to uh dive into that a little deeper uh Simon Says is ET a quality company in the energy sector let&#39;s pull that up okay so this is energy transfer energy transfer and this is a pipeline company pipeline company okay and I believe it is a yeah it&#39;s a limited partnership so first thing you have to understand about this name is that the dividend yield is also uh going to be taxed at your ordinary income tax rate so it&#39;s not a qualified dividend so when you see this 8% know that that&#39;s not really 8% it&#39;s not the same as an 8% that you get from qualified dividends because the qualified dividends can be taxed at either 0o 15 or 20% where this is going be taxed at whatever your income tax rate is could be 25 30 could be up to 50% if you&#39;re in a very high tax bracket in a high tax state so that&#39;s number one that you have to consider but when it comes to profitability look at return Equity seven or sorry return invested Capital only 7% the longer term average is only about 6% and then if you look at the debt inance balance sheet right you have $ 53 billion in long-term debt on a 52 billion market cap that looks like a leverage balance sheet with fairly low profitability would you call this quality Luke no no yeah I wouldn&#39;t call equality um any other ones that are yeah so this is actually one that I want to touch on so it says Justin and Luke great ideas on fundamental and technical analysis but why should I spend significant effort to go through an individual stock search and Analysis when 80% of the stocks do not beat the General Market Market why not just invest in the Spy DJI Etc and when I say 80% it&#39;s generally the 8020 rule so it&#39;s a great question so this is actually a great time to point this out you know I used to work for a company that did active mutual funds and this was the perfect example within the past couple weeks of how active management can be beneficial right so if you look at the GameStop situation and this happened back in 2021 and this happened a couple weeks ago that is to say that if you&#39;re indexing and I always say indexing is an excellent way to get exactly the market but empirically what the data tells us is you can do better now the ways people tend to go wrong when they&#39;re seeking to do better are having high turnover strategies they trade too frequently Sometimes the best trade is no trade but when you keep focused on long-term investing and go towards those names that empirically have done better than the overall Market you certainly can have positive returns relative to the market so why do I want to talk about what&#39;s happened recently well GameStop for example if you were invested in an passive fund let&#39;s take the Russell 2000 right where the GameStop would have a pretty significant weight given where its market cap was before the runup so when it starts to run up what happens to people who have invested in the Russell 2000 they hold it they hold it they continue to hold it and then because the it&#39;s now run down and there hasn&#39;t been the annual rebalance of that index you held it all the way throughout now an active managing fund or an active managing person can take advantage of things like that and get positive returns of individual specific names so yes generally speaking indexing is an excellent way to do it but empirically if you look at the data we&#39;ve seen their ways tilting towards value Securities tilting towards more profitable or in this case Quality Companies can give you positive returns in excess of market returns but certainly it&#39;s a big Endeavor I mean we&#39;ve shown you a lot of ways to look for these Quality Companies but it is certainly complex and a lot of people don&#39;t have time to do that and that&#39;s completely fine yeah and just going back to this slide right this is showing you right the market versus quality names you&#39;re getting lower volatility and you&#39;re getting better returns over extended period of times now in every uh year is that going to be the case no but over extended period of times of time when you can focus on the quality businesses you are going to get Superior returns and lower volatility you can see that here since 1990 the market had a volatility 15.3 quality 14.7 and a nearly 9% return versus 7.5 for the overall market and then if you go to here you know you can see here which is um how consistent that blue line is straight through the middle um and so you want to make sure that you&#39;re not just you know if you want to index that&#39;s fine if you don&#39;t want to go through this work that&#39;s fine um but you know if you want Superior returns with lower volatility then focusing on quality is the way to go and you know so many people are focused on income you know a lot of our clients a lot of pre-retirees and retirees are focused on income and you know the the yield on the S&amp;P is what is it one and a half right now yeah something like that so you&#39;re not going to get income from that uh the requisite amount but you also as this presentation is showing is you don&#39;t want to reach as well you want to make sure that when you are looking for dividends that you are Focus focusing on the business first not on the dividends first so that the consistency of that income uh stays there or stays there over the long term yeah before we get to to the next question I do want to tackle two PSAs here uh for the audience which is one says from Laura says that morning star and value line can be free from your local library database section so that&#39;s important to note and the other was that it seems to that for Mark the handout is corrupt we&#39;re having someone look into it just to make sure that we can have it takeaway for you all to have from this from this webinar let me do this I think I can upload see if I can find it there we go let&#39;s see if that one works I just uploaded another handout and that should work let me make sure let me see if uh if that works for everybody okay um let&#39;s see what else says with dividend paying companies sorry with div paying companies do you put any weight on a company that raises dividend by a certain percentage over a long time frame are there certain metrics to look for or simply just consistency uh well yeah we we you want to see that going up over time one of the biggest red flags for a company is actually the dividend going up over a long period and then it going sideways okay uh and that&#39;s just saying okay well they had this history and this of raising a dividend x amount every single year and now it&#39;s suddenly just marching sideways that&#39;s the that&#39;s management saying hey this our business is not made for raising dividends every single year we can&#39;t continue to pay more and more year after year after a year um so I definitely want to see that consistency it doesn&#39;t have to be a lot I just want to see that it&#39;s going up uh over time what about you L uh sorry I&#39;m trying to figure out this uh just trying to make sure this pamphlet Works got it okay um let&#39;s go to the next one and I&#39;m trying to clean up the the list here uh it says per Morning Star since October the utility sector has increased 30% followed by the technology sector with artificial intelligence and the data centage will the Need for electricity grow exponentially on AI search requires 30 times the electricity yeah I mean it&#39;s something we talked about on air um that&#39;s certainly a growth driver um to for the utility industry uh because it&#39;s kind of like the healthcare industry healthcare industry is done very very well because Obamacare has allowed them to have a certain level of profit and they just raise prices and that&#39;s just more Revenue going towards healthare that&#39;s why our healthcare costs continue to balloon because there&#39;s a lot of perverse incentives there and same with the utility sector they can&#39;t force companies or they can&#39;t force individuals to use more electricity but when they go in there set up data centers they&#39;re going to need more electricity and they&#39;re going to earn their profit on on the higher demand so that&#39;s why utility stocks have done well as of late uh and there are other I actually think this is the more durable way to play AI uh is through utility sector and mainly the industrial sector and the companies that are selling products to improve and expand the electric grid so um yeah certainly something uh to watch in in a much better way to look at um look at the uh to try to find income and play AI overall yeah and I think it&#39;s important to note that it&#39;s yes utility businesses can be boring but I think what people don&#39;t realize as much is that some of the empirical data you see that drives higher expected returns can&#39;t necessarily be applied to REITs because they&#39;re different asset class real estate or utilities just because of the profit motive being different within utilities and the highly regulate nature of those utilities so it doesn&#39;t mean that finding quality utility businesses isn&#39;t a way to find outperforming utilities it just means that because of the nature of what is driving profitability within those companies and what is driving those businesses the empirical data doesn&#39;t necessarily match the conclusion that some people uh would would want to drive drive derive from it yeah uh Gary says dividend Aristocrats a good starting point I would say yes you know that&#39;s those are companies that have paid more and more each year uh year after year uh but once again it&#39;s you you don&#39;t want to do this catch all those it&#39;s a divid Aristocrat that&#39;s all I want to look at and vice versa uh you don&#39;t want to exclude a lot of great companies that maybe haven&#39;t been paying their dividend out for very long maybe they&#39;re relatively new and their in their big success and they&#39;ve uh just started to pay out a dividend and that that wouldn&#39;t catch those names so make sure that you&#39;re not uh being too myopic in your search and you&#39;re focusing on the right data points not just some overarching list like uh dividend aristocrat uh let&#39;s see what else are you seeing any other ones Luke uh what are your favorite metrics to use to determine if a good company is fairly valued well you know actually uh one way for for Value I still like price the book some people don&#39;t think it uh adequately incorporates in tangibles I think generally it probably does um I actually like uh taking a look at the company&#39;s profitability relative to its asset value is a really good way to look at profitability so if a company&#39;s spending X am amount to acquire certain assets how is it utilizing those assets in terms of its profitability so its net income relative to the assets that it has acquired is an interesting way to look at things what about you Justin yeah I do think return on assets is uh pretty underrated uh mainly because return Equity employ also takes into account leverage of the business and and so I I like the I I think assets is a bit cleaner it&#39;s as Luke said you know what are assets and how much are they earning off of them and so I think that&#39;s a that&#39;s a pretty good one um on the profitability front and then uh you know from a a multiple perspective like I said before you want to look at the others within the industry and the growth of the company if the grow if the if if this is a secular grower it&#39;s growing 10 15 20% in its earnings every year and does has stability and durability of its business then that is going to require a higher multiple than the overall Market maret I&#39;ll I&#39;ll pay Enterprise Value to iida in the mid to high teens for something like that um but you know you&#39;re seeing companies right now if you look at you know I can just go we&#39;ll just go to AMD right since we were looking at that before um and you you&#39;ll be able to see that the multiples are just way way way out of whack just pull that up here there we go so you can see is it doesn&#39;t have a lot of you know pretty much no debt in its balance sheet that&#39;s great um but its price to sales ratio is 10 times okay that actually 11 times that&#39;s anytime you&#39;re paying over 10 times price of sales that&#39;s very rarely going to work out for you very rarely and their Enterprise Value is 61 that is Extreme extremely high so once again it&#39;s it&#39;s you have to compare it to its industry and you have to compare it to its growth potential going forward yeah just to add on because the the question about using value metrics for technology for example would it uh could you be underwe in technology you could certainly be underweight in technology but I think that&#39;s why it&#39;s important when you&#39;re building a holistic portfolio to have certain guidelines right so maybe you want to take a look at what the market weights technology as and you don&#39;t want to be more than 10% underweight or overweight any given sector and that&#39;s a risk mitigation technique because again it&#39;s not that every period these things are going to have performance over the long term you expect to have lower volatility and higher expected returns but just as another Safeguard against uh you know not being under Diversified or not getting access to you know every part of the market that you should be it&#39;s good to have BS over which you&#39;re comfortable being overweight or underweight any individual sector yeah and Timothy asks what deal breakers if any do you have that classified company as being uninvestable um number one for me is the balance sheet if there&#39;s especially in this environment where inates are headed higher uh a lot of these companies borrowed money and locked in locked in rates at at a time when Capital was very cheap that&#39;s changing and so if over time their cost of their interest costs are going to go up and they&#39;re unable to pay down that debt on a consistent basis because they don&#39;t have the cash flow that&#39;s kind of a deal breaker to me I want I want a company that isn&#39;t going to be focusing on deleveraging their balance sheet I want a company that&#39;s focused on how do I take the cash flow we&#39;re producing today and re investing it to grow the business to maintain the business Etc not to just simply maint stay in business you know when you&#39;re focused just on staying in business uh odds are good that you&#39;re not going to um so that&#39;s kind of a deal breaker for me do you have any uh Luke yeah I think Leverage is important like you said I think how much debt you have on your balance sheet is important uh because you want to take a look at a company as okay if there&#39;s a turbulent time for its business is it able to pay its debts that&#39;s certainly an important aspect of it another is does the company want something that Steve would say all the time doesn&#39;t make money don&#39;t invest in businesses that are not profitable which over the past decade would have been fine because debt was really really cheap but we live in a different environment now so I think now more than ever it&#39;s important to tilt towards companies that actually make money yeah all right well I think we&#39;re coming up on the hour I think this was good we got to a lot of uh great questions hopefully gave you some clarity on why chasing dividends is not what you want to be doing that focusing on the Quality Companies is is truly how to invest to outperform not just the other dividend payers but really the overall Market um and especially get return good Returns on a on a risk adjusted basis too many people focus on just the total return not on that volatility and Quality Companies give you both that&#39;s the best of both worlds better returns lower volatility and that is frankly that&#39;s the Holy Grail of investing that&#39;s really what you want um and so uh hopefully this gave you some insights on how to think about that and execute that on your own if you need help if you do not understand how to do this on a consistent basis for your portfolios I encourage you to reach out to myself or Luke at our company KP Financial all you have to do is I&#39;ll go to our website right now and I&#39;ll show you it&#39;s very simple just click on the portfolio view button right here and fill this out and we&#39;ll get back to you set up a call and then we can uh go from there so I appreciate you all tuning in and uh look forward to our our next invest Tech wealth webinar and talking to you on air very soon have a wonderful afternoon thank you all

Transcript for:Lecture on Economic Growth, Retail Sales, and Quality Investing Strategies

Transcript for:
Lecture on Economic Growth, Retail Sales, and Quality Investing Strategies