[00:02:54] Eddy Elfenbein: We’ll make a list. We won’t make any changes throughout the year. Look at high quality stocks that are going for good prices. Focus on a portfolio like that and that you can do well. And so we just the other day released the name of our 20th buy list. You ask me, well, what kind of stocks we look for? We look for high quality names, stocks that we know will be around for a long time.

[00:03:20] Eddy Elfenbein: Let me also mention that each year with the buy list, what we do is we make five changes. So five new stocks come in, five old stocks go out. So that means that on average, we hold each stock for five years. And I think that’s sort of a good time period to say if a stock has turned out into a good holding or not.

[00:03:42] Eddy Elfenbein: It’s a large part of economic cycle. Also, I think there’s sort of an, people think I’m holding myself back. I actually think it’s very liberating because when I choose the stocks, I have to say to myself, am I comfortable holding this stock? Five years from now and a company like striker. Absolutely, I’m holding, you know, holding those for the next five years.

[00:04:07] Eddy Elfenbein: So in many ways, it adds a level of discipline that I think helps investors. It’s high quality stocks, stocks with strong market niches, strong positions in their industry and usually consistent operating history, rising sales, rising earnings. There’s high quality names going for good prices. That’s what we focus on with the buy list.

[00:04:29] Clay Finck: Yeah, well, later in the discussion, I definitely wanted to get into whether some of these aspects do limit you or not, but one thing I will mention that sticks out to me is that I think since you only make five buys and five sales each year, you need to be a bit picky because if it ends up where there’s seven names you really don’t want to hold on to.

[00:04:46] Clay Finck: You don’t want to be in that position where, you know, you’re taking out five, but you would want to take out more. So, you need to be pretty picky with what you do select. And since you can’t make a single change to the portfolio during the year, I know that, you know, you’re doing a lot of reading, you’re keeping up on your companies and thinking about potentially what moves you want to make once the new year rolls around.

[00:05:07] Clay Finck: In 2024 was another year where the stock market overall delivered really strong performance. Talks of a recession feels like they just sort of withered away. The US economy, it remained strong. The estimated GDP growth for Q3 was around 2. 8%. I’m curious what sticks out to you when looking back at 2024 for the stock market and the economy.

[00:05:28] Eddy Elfenbein: For me, the whole story of the stock market for this past year, and even longer than that, has been this divergence between a very small group of very, very large companies dominating Wall Street to an unusual degree, and that everything else is everything else. So it’s the famous mag seven. And everything else feels like it’s, if you’re not a member of that group, you are badly left behind.

[00:05:55] Eddy Elfenbein: Now, we’ve had periods like this before, but I can’t remember anyone so dramatic and with such a wide gulf between the group, there was a nifty 50 back in the early 70s. That was a good example that came to a rough end for a lot of those stocks, but it’s the incredible. Strength of the mag seven versus the rest of the market.

[00:06:19] Eddy Elfenbein: As far as the economy and broader market goes, I feel like I’ve been promised a recession that never came. And that was so widely believed 18 months ago. It was just obvious we were going to have a recession in 2024, and it just has refused to come. So all the things that were supposed to wreck us about things happening in the Middle East, things happening in Eastern Europe, inflation, the election, all these scary headlines and none of them really impacted the market.

[00:06:50] Eddy Elfenbein: The market had this last year and the year before are two of the best back to back years we’ve had on record has sailed right past the scary headlines.

[00:07:00] Clay Finck: Yeah, well, you mentioned the Magnificent Seven there and I’ll mention that you set a high bar for yourself in benchmarking yourself against the S&P 500.

[00:07:08] Clay Finck: And you’ve still managed to outperform that benchmark since you launched the strategy in 2006. And of the 25 names, you don’t own a single one of the Magnificent Seven. So as should be expected, 2024 was pretty much a mixed bag when looking at the returns of the 25 stocks that you selected at the start of 2024.

[00:07:27] Clay Finck: When I look at the top performers, I see FICO is up 77%, Miller Industries is up 59%, Pfizer is up 58%. Amphenol up 44% and then I’ll mention Heico was up 34%, which we’ll be getting to later in the discussion. And Pfizer, if you’ve actually held ever since you launched the strategy in 2006, you also shared with me that the biggest winner is the one that surprises you.

[00:07:53] Clay Finck: And I’m not sure many investors expected FICO’s PE to go from 60 to 100 this year. So when looking at these best performers, what are some things that stick out to you?

[00:08:04] Eddy Elfenbein: I never know what it’s going to be. And I always get a question. People always say, of your 25 stocks, what’s your favorite? And then it’s like, you think you can just buy one, but that’s not how it works.

[00:08:16] Eddy Elfenbein: I’m always surprised by what it will be. And so I think FICO is number 1 this year, but here’s the thing. I believe it was number 1 last year in 2023 as well. So, there’s a natural tendency to think that these will regress to the mean. Didn’t happen this time. It’s had two stellar years. Miller Industries, it’s our, by far, our smallest stock.

[00:08:39] Eddy Elfenbein: I love following this one. It’s a tow truck company based in Tennessee. No Wall Street analysts follow it. So, I just looked through the 10K and I know as much as anybody else that I thought it was such a great bargain. And it’s done well for us. This year, and I think it did very well for us last year as well.

[00:08:58] Clay Finck: So you actually called it on our show with Miller Industries a couple of years ago. You referenced this stock it was so small. No analysts were covering it and since two years ago the stock’s up 150 Is there anything that sticks out to you in terms of what they’ve been able to do over the past couple of years?

[00:09:15] Clay Finck: Or is it just you know fundamentals improving?

[00:09:18] Eddy Elfenbein: Well, the clear lesson here is that people should be listening to your podcast. What they did was during COVID, it was a very difficult time for the business and they invested in themselves and they brought in their capacity to a very high level. I think with a small company, they were able to sort of make these dramatic moves.

[00:09:38] Eddy Elfenbein: At one point, they were trading at maybe five or six times earnings. Two years before if things had dramatically fallen off during COVID. And then once COVID came away and all the supply chain issues and such, once the economy started getting back on its feet, it was just an incredible boom time for Miller.

[00:10:00] Eddy Elfenbein: And their earnings have been outstanding and far ahead of what they’ve earned in previous years. And the stock finally took off. So Jesse Livermore said it wasn’t my my thinking that made me money was my sitting. That’s exactly what happened with Miller.

[00:10:18] Clay Finck: Speaking of patience, I heard you once say that when you buy a stock, you usually have to wait a few years to see your gains, which highlights the patience needed when buying and holding good businesses.

[00:10:29] Clay Finck: And I know Peter Lynch actually said something very similar. He oftentimes didn’t see his gains until the third, fourth, or fifth year. And I think most people just simply don’t want to wait that long to see their returns. I was curious if you could talk more about this and why the market just seems to force this patience amongst us as investors.

[00:10:46] Eddy Elfenbein: Well, it’s, it’s the failures of humans. It’s the market. You know, the saying is sometimes the best stock to own is one you, the best stock to have is one you already own. And that’s so true. And particularly I go for companies that I think are undervalued. I wouldn’t call myself a pure value investor, but it takes a while for that to be realized by the rest of the market.

[00:11:10] Eddy Elfenbein: One of the things about stocks is they tend to behave like bunny rabbits, that they’ll sit still and still and still, and then all of a sudden they’ll take off. So with so many companies, those big gains come in very brief periods after earnings or some story impacting the market. And that really does require patience, and that’s why we have that five year average holding period.

[00:11:36] Eddy Elfenbein: It really is a benefit.

[00:11:38] Eddy Elfenbein: And inevitably, when you select 25 stocks, there’s going to be some that surprise to the downside. And one thing I really appreciate about you is that you aren’t afraid to discuss your mistakes since mistakes can serve as an opportunity to learn and improve.

[00:11:53] Eddy Elfenbein: Well, I am afraid, but I do it anyway.

[00:11:56] Eddy Elfenbein: And it’s so frustrating to talk about your failures, but like you said, if you have 25 stocks, you know, get ready for this because you’re going to have one dud and perhaps a couple duds. And, you know, then you have to hear things on social media. Oh, this guy Eddie doesn’t know what he’s talking about and things.

[00:12:15] Eddy Elfenbein: And that happens. So, I had Celanese. this year. It was an absolutely dreadful stock. It was down over 50%. Another one that was a terrible start was Polaris. They make all those cool off road vehicles and, and boating things, really neat company. You got to learn from it. And that’s the important thing is to learn from your mistakes.

[00:12:40] Eddy Elfenbein: With Polaris, I didn’t appreciate the extent to which Interest rates would impact their business and it’s heavily financed. It’s a financially related stock that’s a classic consumer non cyclical. I didn’t fully appreciate that and that really damaged us this year. Fortunately, we have 25 stocks so other stocks can do the heavy lifting, but you got to look at your mistakes.

[00:13:07] Clay Finck: Yeah, so for Celanese and Polaris, these actually were two of the five cells on the year. Is it simply a matter of you were wrong on your original thesis or what qualifies something entering the cell category?

[00:13:19] Eddy Elfenbein: I would describe it like this. It’s when the company is no longer the company I thought it was, the thesis was based around.

[00:13:28] Eddy Elfenbein: And so that certainly happened with Polaris is a good example. There are often times that stocks are bought out. A good example that happened recently was Hershey was had a buyout offer. This is actually their second offer they’ve had in recent years. And there’s a family trust that owns a large part of the voting shares of Hershey.

[00:13:52] Eddy Elfenbein: And I thought, you know, this is an offer. I didn’t know the price, but I have the feeling that it was a good price for them and the trust turned it down. And so that’s not the kind of company that I want to pull. Hershey had actually done very well for us. But then they got hurt in the past year by the global cocoa crop.

[00:14:16] Eddy Elfenbein: There were some heavy rains in Africa and that severely impacted the cocoa market and Hershey’s bottom line. With the stock going down, that’s going to attract buyers. And they had that and they turned it down. So that was enough for me. And I thought that was a good time to exit. But like I said, up until then, it had been a pretty good stock for, I think it may have been the number one stock in 2021 for us.

[00:14:41] Clay Finck: I know this is going to be a popular discussion because everyone wants to know what stock’s a buy. So you added five stocks to the buy list and then had five taken out as you’ve done in previous years. And I was somewhat surprised to see Adobe as a first edition. I’m an Adobe user myself for the audio software we use for the podcast.

[00:15:01] Clay Finck: And it’s just one of those tools that I think is just going to be very difficult to rip out and be replaced by a competitor. When I look at the stock price, it was initially on a tear in 2023, kind of riding the AI momentum, and now we’ve seen it pull back from over 600 to around 450 as of the time of recording.

[00:15:17] Clay Finck: And they’ve just continued to deliver double digit revenue growth for many years. So I’m curious to get your thoughts on what makes now an interesting time for Adobe.

[00:15:26] Eddy Elfenbein: You just made the case. It’s been growing and the stock is down think of a company is if adobe didn’t exist and i gave you i wrote you a check for several billion dollars could you recreate it and the odds are i don’t think you could.

[00:15:42] Eddy Elfenbein: And because it’s so strong, it has such a, a defined market. I love recurring revenue. That’s, that’s a great thing for any investor, wonderful company. And it’s down. And I think it’s one of these stopped five years from now, seven years from now, people are still going to be using Adobe products.

[00:16:01] Clay Finck: Another one you added is Allison Transmission, and that’s a stock that’s up 93 percent year to date.

[00:16:08] Clay Finck: And it’s still even trades at a reasonable multiple in the low teens. And you had mentioned to me that you like to look for companies that aren’t widely followed by analysts, such as Miller Industries, and potentially leads to these mispricings. Allison Transmission, it actually strikes me as one of those boring businesses that are just easy to ignore.

[00:16:27] Clay Finck: It’s not an AI play, and there’s no hype around it. They produce fully automatic transmissions and hybrid propulsion systems for vehicles, and here they have 70 percent market share in their core market.

[00:16:38] Eddy Elfenbein: The more you look at it, you think, this is so much like Miller. Small cap, cyclical play, domestic manufacturer.

[00:16:46] Eddy Elfenbein: And there are so many companies, they just do an excellent job. They’re not widely followed. People don’t know the name. And you look, it really just dominates its industry. If you, if you got to go through them, if you want to build transmissions for the, the really big trucks. But here’s a good example of me not being a strict value investor.

[00:17:08] Eddy Elfenbein: The stock did very well this year, but I still like it. And I still think the valuation is more than reasonable. So a lot of people, a lot of investors are going to say, Oh, it’s doubled in the past year. It can’t go any higher. Same thing we saw with FICO. It still can go higher. Can have a minor pullback and go even stronger.

[00:17:29] Eddy Elfenbein: It’s a wonderful little company and it may not do well in 2025 and maybe another stock that won’t really get on its legs until 2027 or later.

[00:17:41] Clay Finck: Yeah, and I think my big concern with this one would just be the cyclicality. You know, Polaris got whacked in 2024 due to cyclicality and you know, higher interest rates.

[00:17:50] Clay Finck: And yeah, I’d be curious if how you sort of work through that risk with this one.

[00:17:54] Eddy Elfenbein: Understand that there are cycles within the market and in fact, you know, the economic cycle and so many businesses, investors understand it’s like chemicals or railroads and home builders. You’re going to get this sort of wild sine wave with the performance of these stocks and the performance of the businesses.

[00:18:15] Eddy Elfenbein: So it’s important to have kind of, when you look at the cyclical, you, you want to have a broader time horizon on how you view its previous performance. Because sometimes, you know, it’s just, like Michael said, there are no geniuses, there are only cycles. And that’s so true. It’s so much of Wall Street.

[00:18:36] Eddy Elfenbein: So within cyclicals, just be aware that it is a cyclical and that in many ways, when the valuation, it’s like holding a magnet near a compass, you can get kind of screwy readings. So I tell investors, be aware, just understand that there are some companies who follow the broader economic cycle. It doesn’t mean they’re good.

[00:18:58] Eddy Elfenbein: It doesn’t mean they’re bad. It’s just something that you have to deal with as investors.

[00:19:03] Clay Finck: So, looking at the current list, one of the names that stood out to me was Heico. This year, actually, Berkshire Hathaway had been purchasing shares in Heico and it remains on your buy list, which you know, it took me a little bit by surprise seeing some of the, these great investors buying into this name.

[00:19:19] Clay Finck: I know Franchois Rochon also has a sizable position in this company and Tom Gayner also has a small position. And when I pull up a FinChat. It’s showing me a PE of 64, EV to EBIT of 38. And, you know, this has just been one of those stocks that’s beaten the market by a mile over the past two decades.

[00:19:36] Clay Finck: I’m curious if you could share what gave you the confidence to own this business despite the current valuation.

[00:19:42] Eddy Elfenbein: So much of it, our conversation has always come back to, you got to fight your emotions because your emotions are just going to make you a poor investor. And I have to admit, I got wrapped up with Heico.

[00:19:53] Eddy Elfenbein: I owned it years ago. It was on the buy list, did very well. And I said, it’s gone up too much. I got to get rid of it. They just kept going up and up and up. And then I said, okay, I’m going to add it back. And it’s been going up and up and up. So exactly all my emotions, all my initial impulses have been 100 percent wrong.

[00:20:13] Eddy Elfenbein: And I’ve been able to fight those and to do well in that. So, I’m not terribly concerned about the elevated PE ratio. I’ve not done well as timing for valuation purposes. Strong companies are able to routinely make up for that. Also, when you look at a company like Heico, I don’t know how well traditional metrics can work when you consider things like it’s very strong market position.

[00:20:42] Eddy Elfenbein: And it’s, and it’s management how well it’s run. Does that add 10 or 15 to the PE ratio? Should it? I don’t know exactly, but I know it continues to do well.

[00:20:54] Clay Finck: Yeah, and when I look at the, the 25 stocks, you know, I think there’s a good balance. You know, I see like FICO and Heico, you know, might be an elevated PE’s.

[00:21:02] Clay Finck: You know, it’s not 25 stocks trading at these excessively high multiples. So you have a bit of cyclicals, you know, maybe some value stocks and maybe you know, these very high quality businesses. I think it’s the set that sort of can weather through any sort of market environment.

[00:21:16] Eddy Elfenbein: That’s the idea. So you always want to make sure your portfolios broadly diversify.

[00:21:22] Eddy Elfenbein: If I could add something, I’ve seen so many investors. We would say you know, I am diversified. I owned Google and Microsoft. So yeah, I’m diversified. Well, that’s not diversification. You want to make sure you have defensive stocks, value stocks, growth stocks, all kinds of stocks that can work well in different environments, because you’re not always going to have a blood based bull.

[00:21:45] Eddy Elfenbein: There’s always going to be areas. In bear markets, you’re going to have areas that are doing well, and in bull markets, you’re going to have areas that are lagging.

[00:21:52] Clay Finck: We discussed earlier that the best performer tends to be one that surprises you. But I think many people don’t want to hear about an investor’s fifth best or 15th best or 25th best stock idea.

[00:22:04] Clay Finck: And I know you follow, you know, the broader economy quite closely through your newsletter and such. Are there any stocks that you think are well positioned going into 2025, whether it be a new edition or something that’s already in the portfolio?

[00:22:17] Eddy Elfenbein: I mean, I mean, so many are it’s hard. It’s hard to single out any one in particular.

[00:22:23] Eddy Elfenbein: I think Striker, a good example company has always done well. Abbott Labs, they just raised their dividend for I think the 53rd year in a row. Moody’s, just a great company always seems to prosper no matter what. Interesting name we had this past year was a new name for 2024 was McGrath RentCorp. And I added it, and then by maybe January 15th or so, it was not long into the new year, they had a buyout.

[00:22:53] Eddy Elfenbein: And it shot up, and the fight with the government to get this deal done was just dragging out and out and out. It was taking months. And then finally, the company said, we’re done. We’re not going to do a this merger. Very frustrating, because as soon as that merger. Deal was announced. I assumed that McGrath was not going to be part of the 2025 buy list.

[00:23:19] Eddy Elfenbein: I just didn’t assume, I assumed that would be that when everything fell apart, I said, and this company is still in good shape. And I think it may be one of those ironic examples where, you know, not having the deal could be quite beneficial for our shareholders. It’s a strong business, a consistent business.

[00:23:38] Eddy Elfenbein: So, I think I should say I wouldn’t be surprised if they do very well in 2025. It’s McGrath Rent.

[00:23:44] Clay Finck: Yeah. For those tuning in, that is a ticker MGRC. If you’re interested in looking further into that. I wanted to discuss the strategy a little bit more, you know, I mentioned you are equal weighting these positions, which the first thought that comes to my mind is this is going to limit the performance of many great investors because you are able to bet bigger on your best ideas and you’re also inevitably going to trim down your winners.

[00:24:11] Clay Finck: So when FICO goes up 77 percent it’s going to be pulled back in terms of the waiting. I was curious if you could share your thoughts on, you know, if you think equal waiting might hinder the performance and have you considered dropping that approach altogether?

[00:24:25] Eddy Elfenbein: I’m fine with it because equal weighting I think is the most neutral way to go about this.

[00:24:30] Eddy Elfenbein: So I don’t want to think people think I’m adding a layer of my own decisions if I were to, you know, overweight companies that I think would be the best bots. As I say, within the 25, I never know what that’s going to be. And the same thing would work in reverse. If I were to lighten up something, I would want to get rid of it.

[00:24:50] Eddy Elfenbein: This system is, works the best that I think it keeps. the overall risk of the portfolio lower than than it would be. It is a little difficult at different points, you know, to think, oh, I would really, would I like to take some profits here and redirect it over here? Do in nature, absolutely. But I think it’s best just to leave it as, as it is.

[00:25:14] Clay Finck: Does your conviction vary too much between the 25 names or would you say it’s fairly similar?

[00:25:19] Eddy Elfenbein: It’s fairly similar. It’s, it’s hard to choose which is your favorite child, you know, of them all. And they all, they all have different aspects that I, that I appreciate about that.

[00:25:31] Clay Finck: Another thought experiment I had is since you’re only making changes once a year, there’s going to be points in, during the year where you just feel like you really want to make a change.

[00:25:40] Clay Finck: And now looking back. You know, you sort of wish you would have, you know, if something is sort of getting hammered in the current environment and the stock price just keeps dropping. Yeah, I was curious if, if you’ve ever considered tweaking.

[00:25:50] Eddy Elfenbein: Always. Well, a good example is what we had just, if you remember that very beginning part of August was really three days that the market dropped very sharply and it came amidst a period of very low volatility.

[00:26:06] Eddy Elfenbein: So it was kind of shocking to get this, this punch from the market that, you know, in retrospect, it lasted three days going through it. It seemed very unpleasant and seemed like this might be the start of bad things. That’s not what happened at all. The market kept rallying right through the end of the year.

[00:26:24] Eddy Elfenbein: But that was a good point where I thought, you know, this is, this is unpleasant going through. Maybe I, you know, I’d like to make some changes. But overall, I’ve always kept loyal to the strategy, but yeah, it does happen a lot.

[00:26:38] Clay Finck: I mentioned your newsletter, you write quite a bit about just what’s happening in the macro environment, but you’re still a fundamental bottoms up investor for the most part.

[00:26:47] Clay Finck: I was curious if you could discuss how you balance, you know, being macro aware while also not letting it override your overall investment process.

[00:26:56] Eddy Elfenbein: Yeah, that’s a that’s a good question. It’s, it’s difficult to answer because the room that it deserves, because it’s a, it’s a good topic. I think too many investors, they invest from 30, 000 feet.

[00:27:08] Eddy Elfenbein: So they’ll say, oh, I don’t like, you know, what’s happening in politics. I don’t like the Federal Reserve. I don’t like tax, this or that. And that really can have very little impact. On the overall investment picture, they said, I think the stock market went up 75 percent from 2 years and 3 months ago until 1 month ago, enormous returns.

[00:27:32] Eddy Elfenbein: I don’t think many people were seeing that now. There are areas that I do like to look at, in particular, the interplay between interest rates. and the stock market. So we see, as we talked about before, the cycle between value and growth that’s often determined by the direction of short term interest rates.

[00:27:55] Eddy Elfenbein: In fact, it can be so sensitive that we’ve seen recently just the promise of lower interest rates has been pared back and that has strongly impacted growth versus value. So these ways where the macro environment can seep in and affect broader trends within the stock market. I also like to look at the interplay between defensive stocks.

[00:28:20] Eddy Elfenbein: And cyclical stocks. And that’s usually driven in large part, or is related to long term interest rates. So in that sense, I like to look at what’s happening with the economy. It really comes down to the measurement of risk. That’s really what it is. And I like to see how the economy impacts those areas of the market.

[00:28:42] Clay Finck: You referenced a quote from your newsletter that I wanted to read here. You wrote, I feel as if I was promised a recession for this year and we’re not going to get one. That news is far more upsetting to some people than I would have expected. I think one thing that’s sort of surprising to me, you know, in investing in this type of environment is that things are just always changing and they’re always different.

[00:29:03] Clay Finck: So people will look at, you know, various indicators and say there’s going to be a recession, but the market doesn’t always respond how it did in the past. And I think one thing that’s sort of impacting today’s market, who knows how, how, how much validity it is, but it’s just like the federal government’s fiscal spending and that being injected into the economy.

[00:29:22] Clay Finck: And it seems to have just really fueled like the, that magnificent seven. It’s been sort of a talking point that these top big tech companies are, you know, continuing to dominate. And that’s been a talking point for many, many years. I’m not sure if you have more to add related to the current market environment.

[00:29:36] Eddy Elfenbein: It seems as a very unusual environment in that, as I said before, everything is the mag seven and it seems like everything else. And you look around and you can see some pretty compelling valuations that maybe they’re waiting for a catalyst. Maybe, you know, they’re waiting for if the economy suddenly slumps.

[00:29:58] Eddy Elfenbein: Always be aware is that there’s no one stock market. There are thousands and thousands of stocks and they all can be doing different things at different times. So always be wary when, when the the various bill was become all about politics, all about the Fed and all about the market.

[00:30:19] Clay Finck: So the vast majority of investors I speak with here on the show, they manage their own fund and typically have a entire team around them.

[00:30:26] Clay Finck: You know, think managers like Francois Rochon, Dev Kantessaria, Andrew Brenton. But interestingly, you run an ETF, so anyone listening to this can go out and buy a share of that ETF or call it 64 as of the time of recording. I’d be curious to hear more about your experience in managing a portfolio in this ETF structure and why you felt that was the best route to go for you.

[00:30:49] Eddy Elfenbein: So what had happened was the, I had been publishing the buy list for a number of years and I just built up, you know, it was on my blog and had more and more followers over the years. They said, we really like your approach. We love what you do. We love the returns. We do you have a product that we can invest in your hedge fund or anything for so many years.

[00:31:10] Eddy Elfenbein: I said, no, there was no way you can do that. And I was able to connect with advisor shares man named Noah Hammond at advisor shares. I met with them, we talked about it, we said, you know, is there a product, an investable product that we could offer people? And we, we looked at it, we we did queries, we polled readers, and we said, yeah, we, we think there is something.

[00:31:33] Eddy Elfenbein: So we launched the ETF and I was able to get CWS, it’s the ticker symbol for Crossing Wall Street. I’ve never chosen a ticker symbol before and I think it was a good product for us. We came at the right time in the industry, which I think it was more open to kind of different ideas. Maybe, you know, out of left field ideas.

[00:31:57] Eddy Elfenbein: I think that the industry has changed and it’s less willing. To get, you know, an off the beaten path kind of fund. There’s a hump to get over around 20 to 25 million, depending on the structure of the fund. And it’s very unprofitable when you’re below the hump, but when you’re above it, it can be very profitable.

[00:32:21] Eddy Elfenbein: And for us, it just took a long time, just convincing more and more people that it was a good fund to invest in. We got our fifth star from Morningstar. So it’s starting to be a pretty sizable product. I think we’re at the top, maybe 30 percent size wise of of ETFs. Getting the five star from Morningstar was a huge help.

[00:32:43] Eddy Elfenbein: And just being open to people talking to different investors and offering a product that we don’t think you can get anywhere else to buy one share of all of the stocks on the buy list, I think is 4,000 or 5,000, but we offer it all in a in a stock that’s around 66 per share.

[00:33:04] Clay Finck: One common thing amongst the many portfolio managers is that you know, they put a pretty big emphasis on their investor base and ensuring their partnering with people that think longterm and stick with them for the longterm.

[00:33:16] Clay Finck: Have you found that liquidity to ever be an issue from your end in terms of, you know, you often hear that a lot of investors in Cathie Wood’s fund, for example, would, you know, buy the top and sell the bottom. So that even if she’s doing well at certain points, then you know, a lot of her investors are underperforming the fund itself.

[00:33:32] Clay Finck: Have you found the liquidity to ever be an issue?

[00:33:36] Eddy Elfenbein: That’s a very good question, because that really was a mystery. We didn’t know what was going to happen when we had downturns, and I’ve been pleasantly surprised that it’s a very sticky fund, and we haven’t had the massive drawdowns that you have in other funds.

[00:33:54] Eddy Elfenbein: So we’ve had a few brief periods, for example, for COVID, but we knew that wasn’t really us. And there have been some other periods, but I’ve been surprised that when bad things have come, and they’ve had over the last eight and a half years, they’ve been very sticky. And I guess we’ve, we’ve taken a long time to craft our message and to get this, the idea that we’re following the system out there.

[00:34:19] Eddy Elfenbein: So people are loyal to it.

[00:34:22] Clay Finck: Well, wonderful Eddie, I really appreciate you joining us here again today to discuss the buy list and all the updates to bring in the new year. I’d like to give you a chance to give a handoff to the audience on how they can learn more about you, your blog and the ETF.

[00:34:35] Eddy Elfenbein: Well, you can go to the blog, which is crossingwallstreet.com. I also have a Substack. So that’s cws.substack.com. And so I send out two issues each week. I sent out an issue on Tuesday and that’s a free issues at supermarket general market commentary and talking about different things going on in the market. I like to feature an interesting stock that maybe people don’t know about.

[00:35:04] Eddy Elfenbein: And then on, I said it late Thursday, I did it Friday, is the premium. That’s where I talk more in depth about what’s going on with the buy list and, and the stocks, the news, and the more nitty gritty of investing as far as the ETF. So the ticker symbol is CWS and it’s the advisor shares focused equity ETF.

[00:35:26] Eddy Elfenbein: We have lots of data. I do quarterly summaries about what’s going on. So we have all the interesting news and events where you have to have even just a tiny amount of cash into a fund just to keep it running at Bradley. We can’t say we mimic the buy list. But it’s based off the buy list and we do it as best we can and it really does a matching.

[00:35:49] Eddy Elfenbein: So if you want to follow the buy list and see the different stocks we have in there, certainly you can do that. There’s a buy list page at the blog. Advisory Shares has been a great partner for us. Eight and a half years, have great bunch of partners who have invested with us. We’re going to keep doing what we’ve been doing.

[00:36:07] Clay Finck: Wonderful. Thanks so much for joining me. I really appreciate it and really enjoyed this chat and diving into some of these names.

[00:36:14] Eddy Elfenbein: Thank you.

[00:36:15] Clay Finck: All right. So that wraps up the first segment with Eddie Elfenbein. During this next segment, I’ll outline one of my more recent stock purchases, which is Lumine.

[00:36:23] Clay Finck: It should go without saying, but me sharing this name should not constitute a buy or sell recommendation. It’s for informational purposes only. I bought this stock in October of 2024. The ticker is LMN. It trades on the Canadian Venture Exchange. I acquired shares of Lumine at an average price of 32. 88 Canadian dollars, and as of the time of recording, the stock trades for around 41. 1 Canadian dollars. To understand Lumine, we first need to understand the company that they spun out of, which is Constellation Software. Constellation is led by Mark Leonard, who is the founder and president of the company. Back in March of 2023, I released a podcast on Mark Leonard’s letters on episode 531.

[00:37:07] Clay Finck: And during that episode, I shared why I believed that he was one of the best capital allocators I had ever come across as he’s consistently generated a return on invested capital of around 30 percent and reinvested virtually all of the company’s cash flows. So I purchased my first shares of Constellation at 23. 61 Canadian dollars, and here at the time of recording, shares trade for 44.50. If only I would have wisened up and not been so timid with my initial purchase, but I’m happy to have added more shares along the way. For those of you who use mainstream brokers like Fidelity and Vanguard, you might find that you can’t purchase Lumine or Constellation with these brokers.

[00:37:46] Clay Finck: If you’d like access to international stocks, I’d highly recommend interactive brokers. Which I can get linked in the show notes below. Interactive Brokers offers access to essentially any stock I could have ever wanted access to, and they offer very competitive fees to the best of my knowledge. In short, Constellation Software is a serial acquirer that buys vertical market software companies and holds them forever.

[00:38:09] Clay Finck: You can think of a vertical market software product as something that caters to a very specific niche or vertical. This might be something like software that caters to a golf course and managing reservations or managing a golf tournament, for example. On the other hand, a horizontal software product can apply to really anything, such as Microsoft Excel.

[00:38:28] Clay Finck: Constellation is based in Toronto. It trades under the ticker CSU on the Toronto Stock Exchange. Leonard started the company in 1995. And since then, they’ve completed well over 700 acquisitions. The typical deal size of these acquisitions is only around 5 million. But as they’ve scaled up, they’ve occasionally done these larger deals, some as large as 700 million.

[00:38:51] Clay Finck: Now, these VMS companies were attractive to Leonard for a number of reasons, a few of which I’ll list here. They provide mission critical services to their customers. They have high recurring revenue. They represent a very small amount of the overall expenses for these customers. So there’s very little incentive for these customers to switch to a competitor.

[00:39:09] Clay Finck: They tend to dominate their niche, which also tends to be very small. So there’s little competition. And Leonard was also able to buy these small VMS companies at attractive prices and provide a forever home to them. And this strategy has generated a 25 to 30 percent return typically on these purchases.

[00:39:27] Clay Finck: With that said, there are a lot of companies in the market today buying these types of businesses. So Constellation is also very disciplined in the types of companies they will buy, but what they will pay as well. In my view, their discipline in ensuring they are earning a high return on capital is one of the most valuable parts of this business.

[00:39:46] Clay Finck: They aren’t going to go out and take unnecessary risks and they likely aren’t going to lower their hurdle rates just for the sake of getting capital deployed. Leonard implemented this strategy successfully for a number of years. The stock went public in 2006, and it’s essentially been a straight ride up for shareholders as they’ve essentially reinvested 100 percent of their cash flows along the way at that high rate of return around 30%, excluding some dividends that were paid out along the way.

[00:40:13] Clay Finck: Now, in recent years, Constellation has done a couple of spinoffs in 2021. They spun off topicus.com, which is another stock in my portfolio. Topicus is a carbon copy of Constellation, except it’s run by its own management team and they make these acquisitions primarily in Europe. So they can go into any vertical, but they’re generally contained to Europe.

[00:40:35] Clay Finck: In 2023, Constellation performed their second spinoff, which was Lumen Group, otherwise known as Lumine, which trades under the ticker LMN on the Canadian Venture Exchange. And before I forget, I’d also like to give a big shout out to my friend Cochran from the Seeking Winners sub stack for helping me better understand this company.

[00:40:52] Clay Finck: He was extremely helpful in helping me sift through the accounting jargon in the complexities of the spinoff transaction. And he also put together a wonderful free writeup that I’ll be sure to get linked in the description below for those interested. Now instead of going into just any vertical, Lumine purchases companies in one vertical specifically, which is the media and communications vertical.

[00:41:13] Clay Finck: So they aren’t constrained by geography like topic is, is they can look for companies in this one vertical all over the world. And one of the statements related to Lumine spinoff, Mark Leonard stated, I look forward to having CSI’s long term shareholders become long term shareholders of Lumine. I hope my grandkids are still holding Lumine shares 50 years from now.

[00:41:35] Clay Finck: Now talk about someone who thinks long term. You just don’t hear public statements like that from most managers, or at least I haven’t. From a high level, Lumine is a strategic acquirer and developer of vertical market software businesses within the global communications and media industry. Their core mission lies in identifying and acquiring high potential VMS companies with a focus on the specific needs of customers in various communications and media segments.

[00:42:02] Clay Finck: The company is led by CEO David Nyland. He joined Valeris in 2014, which is an operating group within Constellation to help build the communications vertical. As of the time of recording, Lumine owns around 30 companies. They acquire around 2 to 6 businesses per year. The average purchase price paid per acquisition is around 11 million dollars.

[00:42:22] Clay Finck: That was at least prior to the spinoff transaction where they made a big purchase with Wide Orbit. And what I also like to see is that businesses that Lumine owns are mission critical in the end markets are also essential. So you think about things like the internet or mobile phone connectivity. These are just industries that just aren’t going away.

[00:42:42] Clay Finck: They look for companies that are typically number one or number two in their niche market. And they also tend to look for a diversified customer base to ensure that they’re not dependent on a small number of customers to deliver those strong financial results. Following each acquisition, Lumine strategically invests in these businesses Bolstering their core functionalities and unlocking opportunities for international expansion by taking advantage of a playbook of over 250 plus best practices that leads to organic growth.

[00:43:12] Clay Finck: Now, the investment case for Lumine is as follows, which is something that I pulled from the Seeking Winners sub stack, which I thought was very well put together. The playbook really is to acquire VMS businesses in the media and communications verticals while achieving a high return on invested capital on these acquisitions.

[00:43:29] Clay Finck: Typically, the company is going to aim for and return on invested capital of 20 to 25 percent based on the net operating profit after taxes. Over time, they want to generate consistent low single digit organic growth rates with limited wasted spend on research and development and sales slash marketing.

[00:43:48] Clay Finck: Next, they’ll use the free cash flow generated from their existing businesses and redeploy as much as possible back into acquisitions. So this is really the engine of buying these great businesses and taking the cash flows and going out and buying more great businesses at good prices. Next year, continue to take advantage of quote unquote carve out deals.

[00:44:08] Clay Finck: These can be really attractive to Lumine because of the low valuations they’re able to get in the technical expertise that is needed, which means limited competition from other buyers. And finally, take advantage of the slowing communication and media industry to acquire cheap companies and use best practices to improve the organic growth rates and margin profiles of those acquired companies.

[00:44:30] Clay Finck: Since Lumine specializes in this vertical, they may be able to recognize unique opportunities that exist in making these acquisitions that many other buyers might overlook or undervalue. Additionally, if many businesses in this space are low growth or declining, that might mean that there isn’t a lot of competition from private equity and these other buyers.

[00:44:50] Clay Finck: Now, part of the attractiveness of Lumine for me is simply their focus on compounding the long term growth and the intrinsic value of the business. Mark Leonard in his shareholder letters outlined that shareholders can estimate the per share growth and intrinsic value. As a return on invested capital, plus the organic growth rate.

[00:45:09] Clay Finck: You know, this does not apply to every business, but I do think it’s a good measure when thinking about the growth and the intrinsic value of Lumine. In recent years, Lumine has been growing the intrinsic value of their business at around 25 to 30 percent per annum due to their continued reinvestment engine and the organic growth rates.

[00:45:27] Clay Finck: If they’re able to continue to grow their intrinsic value at 25 percent or more for the years that lie ahead. I think that shareholders are going to be quite happy with the result as very, very few companies are able to do that over long periods of time. Another one of my favorite things about Lumine is the skin in the game and the alignment of incentives.

[00:45:47] Clay Finck: Constellation is oftentimes referred to as the gold standard when it comes to incentives. One thing they do is when cash bonuses are paid out, key managers are required to invest anywhere between 50 to 75 percent of that bonus into shares on the open market, which are locked up for three to five years.

[00:46:05] Clay Finck: This incentivizes the key managers to think like owners and share in the company’s longterm success. The same goes for the board members as well. They have to invest at least 50 percent of their bonus directly into shares. Now, this template from Constellation carries right over to both Topicus and Lumine, the two spinoffs.

[00:46:23] Clay Finck: Now, we’ve seen how well this incentive structure has played out for Constellation over the past 20 plus years, so I’m excited to see how well it ends up working for the two spinoffs as well. Another piece that’s interesting is that the bonuses are calculated based on the company’s performance. More specifically, the difference between the return on invested capital and the cost of capital.

[00:46:43] Clay Finck: So this means there’s no bonus payout unless the company creates shareholder value. And while many tech companies issue quite a bit of stock based compensation, Constellation and Lumine don’t issue any new shares. So rest assured that existing shareholders won’t see any dilution at all. Perhaps in the future, they will issue shares if it’s really attractive to do so, but it isn’t something that we’ve seen so far, not something that I would typically expect.

[00:47:09] Clay Finck: The Lumine portfolio has around 30 companies. The CEO, David Nyland, has described the pipeline as in the low thousands of potential acquisition targets, and they’re in conversation with hundreds of them. So there’s a very long runway for growth and continued reinvestment. Historically, they’ve completed anywhere from one to two to six acquisitions per year.

[00:47:30] Clay Finck: And they make larger acquisitions than Constellation’s smaller bread and butter type purchases, you know, around that 5 million range. Lumine’s purchases are a bit bigger. So we can expect the cadence of acquisitions for Lumine to be a little bit lumpier. They lean towards making these carve out purchases, which is essentially buying an orphan company from a larger business who sort of just wants to get rid of it. There’s less competition in this arena due to the technical skills that are required to complete these types of transactions. Now let’s turn to the valuation here. The stock has run up over the past few months, so the valuation isn’t quite as appealing as it was earlier this year.

[00:48:09] Clay Finck: Who knows how the stock is going to do in 2025, but I expect it’s going to do well over say the next five years, which is of course why I still have it in my portfolio. As of the time of recording, Lumine’s market cap is 7. 5 billion U. S. dollars. With an estimated $194 million in EBIT for 2024, that gives us a multiple of around 45, so the company trades at a significant premium to the overall market, the S&P 500 as of the time we’re recording trades at a multiple around 25.

[00:48:39] Clay Finck: But I’m of the opinion that Lumine is also is significantly higher quality business than the average company in the S&P 500. As the company has a very high return on invested capital and they have a lot of room to reinvest that capital and grow. The key factors to think about on if this will be a successful investment or not is can they continue to reinvest the majority of their cash flows?

[00:49:01] Clay Finck: Can they continue to achieve a return on invested capital in excess of 20%? Can they achieve a positive organic growth rate? And can they do all of this for at least the next five to 10 years? When I project out revenue growth of around 30 percent for five years, which then tapers down over the following five years, I come up with an intrinsic value that’s above the current market price.

[00:49:24] Clay Finck: But as with any model, you can make the valuation say whatever you really wanted to say, which is why I’d rather highlight those key variables of things like continued reinvestment, a high return on invested capital, solid organic growth rates, and a long reinvestment runway. The bottom line is that I believe that management will continue to grow the intrinsic value at a satisfactory level over the long term, and which is why I decided to enter a position and put more emphasis on that business quality rather than trying to pinpoint the exact valuation I think the company should be trading at or the exact valuation I should be entering the stock.

[00:50:00] Clay Finck: A lot of times it’s just better to enter a high quality name and average in over time rather than waiting for bargain prices that might never come. With that said, listeners can plug in their own assumptions for what they deem to be reasonable and find a price that makes most sense to them. A couple of other things I’ll mention that I like about this business.

[00:50:18] Clay Finck: First is that I like that the stock flies a bit under the radar. Amongst some quality investor circles, the company’s well known, but I would argue that the circles are quite small. The management team also isn’t promotional, so you won’t see them promoting the company out in the public much at all. Even when I mentioned the name constellation software to some people, a lot of people will say it’s a very well known name, but I’m also surprised by the number of investors I talked to that I’ve never even heard of it or never looked into it.

[00:50:46] Clay Finck: The second thing I like is the counter positioning of the business. If a recession were to hit, I think it could actually be beneficial to Lumine. Since they have these very sticky customers and a high quality revenue base, they’re likely to continue to see business as usual, and they may be able to make some really attractive acquisitions from a desperate seller.

[00:51:06] Clay Finck: This hopefully makes my portfolio a bit more resilient in both good times and bad times. So that outlines my pick for 2025. We’ll see how well they’re able to continue to deploy capital and execute this year. And hopefully I’ll own shares alongside Mark Leonard’s grandchildren many years down the line.

[00:51:24] Clay Finck: Thanks for tuning into today’s episode. If you’re interested in collaborating with TIP hosts and other vetted members of our audience, you may be interested in joining our TIP mastermind community. The TIP mastermind community is the community we put together for portfolio managers, private investors, and high net worth individuals who want to network with others, talk stocks, or join our weekly live zoom discussions.

[00:51:46] Clay Finck: We also host a number of live events for the community in Omaha, New York City, and London. If this sounds interesting to you, be sure to join the wait list at theinvestorspodcast.com/mastermind, or simply shoot me an email at clay@theinvestorspodcast.com. You can also find a link to the community in the show notes below.

[00:52:06] Clay Finck: Don’t wait as we’re approaching our limit of 150 members. With that, thanks so much for tuning in and I hope to see you again next week.

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