On our last episode for 2023, I’m flying solo, but I do have a pre-recorded pulled pork from TK on ERD, and I’m also talking about the sudden falls last week by CLX, MTO, and ASG, as well as the first of Morgan Housel’s “100 LITTLE IDEAS”.

Only in the Club edition: I asked ChatGPT to pick out a couple of highlights from our 2023 podcasts for the recap.


QAV 652 Club

[00:00:00] Cameron: Alright, let’s do this. Cam by himself. Cam Solo. That’s my new name. Cam Solo. Episode 652 of QAV. My annual tradition, doing Christmassy episodes without Tony. He’s chillaxing, playing golf down at his Cape Schanck property. Give him a couple of weeks off to de stress. I’m, uh, gonna do something a little bit different this time. Uh, in previous years, I’ve done compilations of things that I thought were interesting topics over the previous 12 months. This time, instead of me choosing the most interesting points, I’ve asked my new best friend, ChatGPT.

[00:01:07] Cameron: ChatGPT. com To come up with a list of the most interesting topics that we’ve discussed this year. How did I do that? You might ask. Well, I’ll explain a little bit later on. Also, in this episode and next week’s episode, we’ve got Pulled Porks from Tony that we pre recorded last week. This week’s will be on ERoad, E R D.

[00:01:31] Cameron: That’s coming up soon. But, before I get into that, let’s talk about what’s happened in the market, uh, since our last episode. Now, I’m recording this on Boxing Day, Tuesday the 26th of December, 2023. While my family is out doing family type things, I’ve taken the opportunity in a quiet little house. Merry Christmas, by the way.

[00:01:55] Cameron: Happy Festivus for the rest of us. Uh, hope you had a safe Christmas. Didn’t get caught up in the storms that hit the East Coast of Australia. Um, but the market’s closed. It was closed yesterday, obviously, Christmas Day. It’s closed today. So there’s nothing really to talk about. In terms of what’s happening this week yet, but last week we had a couple of, uh, really sort of serious declines from stock.

[00:02:22] Cameron: Some that we own, some that we don’t keeping in trend. Tony asked me not to make fun of his, uh, pulled. Pork curses, but I got to mention Core Lithium, uh, because he said not to buy it, you know, because lithium was down, but not long after we put out the Core Lithium Pull Pork last week, it plunged 22 percent in a day after the company announced it was reviewing its business strategy with the lithium price tumbling.

[00:02:49] Cameron: So Tony did say on the episode he wouldn’t be buying it right now, wait until the lithium price recovered. But there were some other stocks that we do own that took a massive hit last week when they mentioned profit guidance. First one I’ll talk about is CLX. CTI Logistics. It said on the 21st of December That it’s profit before tax for the half year to 31st of December, 2023 is expected to be approximately 30 percent lower when compared to the previous corresponding period for the half year to the 31st of December, 2022, quoting here from their letter.

[00:03:32] Cameron: As reported, the result for the previous corresponding period benefited from increased demand for premium freight services due to supply chain disruptions and natural disasters, as well as customers incurring additional transport and warehouse storage costs to ensure their product was closer to the point of sale.

[00:03:51] Cameron: The current half year reporting period has seen a normalization of customer supply chains consistent with the half year to 30th of June 2023. With fewer supply chain disruptions and less consequent demand for premium freight services. Which all sounds quite reasonable, I guess, but the share market didn’t think so.

[00:04:14] Cameron: Share price took about a 7 percent hit the next day. Dropped from 1. 54 down to 1. 41, recovered a little bit to 1. 43 when it closed on Friday. We do hold it in the dummy portfolio and I nearly had to sell it, but I think it’s a three point trend line is a 1. 36. Didn’t quite go down that far. When it recovered, it’s now at a 4 percent profit for us.

[00:04:44] Cameron: We’ve held it since November, 2022 in the dummy portfolio. It had been doing rather well. Now, not so well. We’ll see what happens. One that I did have to sell was MTO, Motorcycle Holdings. Same day, 21st of December. They came out with underlying EBITDA guidance. Motorcycle Holdings Limited, one of Australia’s leading retailers, blah, blah, blah.

[00:05:07] Cameron: Today provides an update in relation to expected earnings before interest, tax depreciation, and amortization. For the six months ending the 31st of December, 2023. They said they expected to report an underlying EBITDA of between 14 million and 16 million for the six months. The wholesale sales of farm vehicles are slowing with increased competition as stock levels for all distributors normalize.

[00:05:36] Cameron: The competitive environment is putting pressure on margins. While retail unit sales of new motorcycles remain strong. Wider economic conditions are driving margin pressures affecting all areas of the business. It fell 28 percent when that news hit, recovered a little bit, but not enough to save it. We owned it in a couple of portfolios and I took a, between a 14 and a 16 percent loss by the time I woke up to how much it had fallen.

[00:06:10] Cameron: Blew through our rule ones in all of those cases. The third instance last week was ASG. Not exactly sure what happened to this one. Jonathan in the club chat mentioned someone in the market was selling two large batches, 100, 000 shares and 200, 000 shares. Uh, but it, you know, on the 20th, it was trading at 2.

[00:06:34] Cameron: 30. Before closed out roughly, it opened at 2. 23 and then continued to 20 before recovering on the 22nd, Friday, finished up about 2. 32, not far below where it was on Wednesday, but we managed to avoid having to sell that one. We hold it in a number of portfolios. It’s up 6, 7, 8%, 9 percent across those portfolios.

[00:07:01] Cameron: We bought around 2, somewhere between 2. 18, depending on the portfolio back, uh, well, one of them actually, since August 22, we bought it at 2. 15. So the others we bought early 2023, but it just goes to show you how quickly some of these stocks can change, particularly when profit guidance comes along at the end of the year.

[00:07:23] Cameron: And sometimes you just take a hit on them, but as my analysis showed when I did it a month or so ago, our rule ones and our three point trend line, uh, sell triggers tend to save us from any disasters. Sometimes they go up after we sell them, uh, quickly. Sometimes they go down even further after we sell them.

[00:07:46] Cameron: Like, um, well, I can’t think of any examples recently, but there’s been a few. Anyway, we will see how that pans out. One other idea I had that I’m going to pursue over the course of 2024, but I’m going to start it today. There’s a, there’s an author, Morgan Housel, H O U S E L, that We’ve talked about a few times on the show, Steven Mabb, Chairman Mabb, has, uh, mentioned to, uh, mentioned him to me a number of times, a couple of his books, that, uh, Steven’s a big fan of, Morgan is a partner at something called the Collaborative Fund, former columnist at the Motley Fool and the Wall Street Journal, And he’s written a number of, uh, popular books like The Psychology of Money.

[00:08:34] Cameron: But I found, um, a blog post of his that I thought was kind of cool. 100 Little Ideas. This is a post from February 2020. He says, a list of ideas in no particular order and from different fields that help explain how the world works. Now, I thought this was interesting building on top of the Charlie Munger quotes that I had, uh, you know, Charlie was a big fan of models for understanding the world.

[00:09:00] Cameron: Perhaps coincidentally, he said that there was about a hundred models that you needed to understand. I’m not sure if they’re the same hundred as Morgan’s hundred, but I thought each week I’d take one of these over the course of, well, I guess it’ll take me a couple of years to get through them and we can just talk about one of them.

[00:09:16] Cameron: I’ll do it with TK when he’s on the show, but I found these interesting and I think you will too. So the first one. Is Depressive Realism. He says depressed people have a more accurate view of the world because they’re more realistic about how risky and fragile life is. The opposite of blissfully unaware.

[00:09:40] Cameron: Now, um, I don’t consider myself a depressive realist or a depressed person. I’m the opposite of that, very upbeat person, but I do consider myself a realist having had several failed startups and marriages over the course of my life. I’m very realistic about the chances of success for most things, but, um, I’m going to combine this with my latest party trick.

[00:10:07] Cameron: I pulled this out at parties. I pulled it out for Tony when we caught up for a Christmas lunch with his family a few weeks ago when they were in Brisbane. Um, it’s Demonstrating ChatGPT 4 V. This is the version of ChatGPT 4 that you can get on your phone or your iPad. The V stands for Vision and or Voice.

[00:10:29] Cameron: This is the version that came out a few months ago where you can take photos of things and it will tell you what’s in the photo. But you can also talk to it. And one of the things I’ve discovered just around, you know, going to parties, Christmas time, that kind of stuff, subject of AI, inevitably comes up because I introduce it into every conversation.

[00:10:47] Cameron: Um, oh, that’s an interesting field of work you’re in. How’s AI going to impact that this year, do you think? And people usually say the exact same thing, which, oh, it’s not going to have any impact at all. And which I laugh, and then I laugh and, uh, and say, really? Wow. Okay. That’s, uh, very confident of you.

[00:11:06] Cameron: You need a little bit more depressive realism, perhaps. Um, and I asked them if they’ve heard the latest version of it talking to you. And, uh, inevitably they say they haven’t, and so I pull my phone out of my pocket and I say, check this out. So, um, I’m going to start a conversation with ChatGPT about Depressive Realism and let’s see what it has to say.

[00:11:28] Cameron: Tell me a little bit about the concept of Depressive Realism.

[00:11:32] ChatGPT: Depressive Realism is a fascinating concept. It challenges the common belief that optimism equates to a more accurate view of reality. Essentially. It suggests that people with mild to moderate depression often have a more realistic perception of their abilities, outcomes, and control over events, compared to non depressed individuals.

[00:11:52] ChatGPT: This idea was introduced in the late 1970s by psychologists Lauren Alloy and Lynn Yvonne Abramson. They found that those with depression made more accurate predictions about their influence in events, while non depressed individuals tended to overestimate their control. It flips the script on how we usually think about mental health and perception.

[00:12:14] ChatGPT: Instead of assuming that depression skews reality negatively, it proposes that maybe depression strips away the rose colored glasses, revealing the world more truthfully. But remember, this doesn’t mean depression is good or desirable. It’s a complex and multifaceted condition, and depressive realism is just one

[00:12:33] Cameron: intriguing aspect of it.

[00:12:35] Cameron: So for those of us that aren’t depressed, how might we apply the learnings of depressive realism in our everyday lives? Applying the

[00:12:44] ChatGPT: principles of depressive realism in everyday life, especially for those who aren’t depressed, involves a careful balance. You’re not looking to become pessimistic, but rather to cultivate a more realistic and perhaps slightly more skeptical view of the world.

[00:13:00] ChatGPT: Here’s how you might do it. One, question optimism bias. We often have an innate optimism bias, thinking things will work out better for us than for others. Challenge this by considering realistic outcomes and preparing for them. Two, embrace uncertainty. Depressive realism suggests a better grasp of uncertainty.

[00:13:19] ChatGPT: Acknowledge that you can’t control everything and be open to various outcomes. Three, Reflect on self assessment. Sometimes we overestimate our abilities or influence. Reflect on your strengths and weaknesses honestly, without the usual self enhancement bias. 4. Seek diverse perspectives. Engage with viewpoints different from your own, especially from people who might see the world less optimistically.

[00:13:43] ChatGPT: This can provide a more balanced perspective. 5. Mindful optimism. Maintain a positive outlook, but ground it in reality. It’s about hoping for the best while being prepared for less favorable outcomes. Six, avoid extremes. Neither extreme pessimism nor extreme optimism is desirable. Aim for a middle ground where you’re hopeful yet realistic.

[00:14:05] ChatGPT: Remember, the goal isn’t to adopt a depressive mindset, but to incorporate a more balanced, realistic view of life’s uncertainties and our own capabilities. It’s about enhancing decision making and perception without losing the benefits of a positive

[00:14:20] Cameron: outlook. So there you go. Maybe I will call my mindset blissful realism as opposed to depressed realism.

[00:14:30] Cameron: Uh, I don’t know what you thought about that audio demonstration. There’s about half a dozen voices that you can pick with ChatGPTV. But the key thing is they all sound extremely realistic with pauses, ums, and ahs. Those of you that listened when I, the last time I used ChatGPT to do a fill in episode, which I think was about six months ago, I had to create my own text to speech generator answers that were nowhere near as realistic as the one that OpenAI came out with using their own tech a month or two ago.

[00:15:05] Cameron: So if that’s how good it is now, imagine how good it’s going to be a year from now. And it makes me laugh now whenever I watch a science fiction film. When you hear robots talking to people, and they all sound like this, how quickly, with the advent of AI, we’ve gone from that to uh, extremely realistic sounding, uh, voice interactions.

[00:15:28] Cameron: Imagine that, uh, a year or two from now, in terms of tech support. You do telephone tech support, or web based tech support, you’ll be able to have natural language conversations. With the website of the business that you’re trying to get support from, it’ll be completely plugged into all of their information, all of your customer information, everything about their side of the business, and it’ll be able to talk to you in just natural language about what your need or requirement is and what they can do to help you.

[00:15:58] Cameron: It’s going to be, I think, an amazingly enhanced customer service experience across the board. Okay, well, let me throw to Tony now with his pulled pork on ERD. And then when I come back, I’ll do a couple of highlights from 2023 as selected by ChatGPT.

[00:16:16] Tony: Another request from Jim I can do now is E Road. This is a company I’m not familiar with.

[00:16:21] Tony: It doesn’t get much coverage. Um, it’s a New Zealand company, so it doesn’t have really have much of a profile in the Australian. Um, Analyst Community or Press, Financial Press, interesting company though, and, and, um, was great fun to research. It’s a, I guess you could sum it up as being a transportation technology company, um, or, or a fleet management telematics company, but basically does a couple of things, but one of the, one of the main ones, which seems to be getting legs in New Zealand and in roads into Australia and importantly, North America is they, they put, um, A little device in a truck or a car that’s part of a company’s fleet that transmits data back to software and the fleet manager can, you know, look at whether the fleet’s being optimized properly and save on fuel usage and other.

[00:17:16] Tony: Utilization costs. So, interesting sort of company. I think this technology may have been pioneered by the insurance companies, because I know when I was in Canada, our insurance company sent me such a device to put in the car, and it was meant to send data back to the insurance company who would then decide whether, you know, they would risk based price my insurance based on how carefully I drive or, or, Or not.

[00:17:41] Tony: So I put my price up if I was a redhead and put it down if I was safe. Um, we didn’t stay in Canada long enough to get any data from that, but that was an interesting concept. Similar one being used in, um, by this company. Looks like it may have had a history in, uh, A particular thing that happens in New Zealand called road user charging, which happens in Australia too, but everyone pays for it through the BOWS or through the petrol price, which they do in New Zealand as well, but once the car, once the truck reaches above a certain tonnage, which I think is about the 3.

[00:18:14] Tony: 5 tonnes, then, you know, they’re deemed to be a heavy user of the road, and sometimes they’re seen as being a cause of potholes and more damage to the roads and smaller vehicles, and so they have to get a license called a road user charge, and um, You So it’s a cost per 1, 000 kilometers and they sort of buy them based on what they think they’ll need.

[00:18:37] Tony: Uh, and it’s all up in the, historically it’s been a manual system. You go in and apply for a license based on what you think you’ll need. Pay a cost, stick a license on your window and it can be monitored by, um, You know, transport authorities, I guess, at Weybridges or something like that to see, you know, what you’ve, how much you’ve traveled and, and if you paid the right license.

[00:18:57] Tony: Very manual process and probably not that effective, I wouldn’t have thought, um, but this company, uh, has been able to elect, electronically, um, improve that process of road user charging and there are other uses, so there are other countries in the world that do this and there are other countries that do things like You know, in the City of London, you pay a charge if you drive your car into the CBD, that kind of thing.

[00:19:21] Tony: So there is other applications for road user, electronic road user charging and tolling than just in Auckland or in New Zealand. So this could be exported. But it seems like the main part of the business is in this fleet management telematics, which is very interesting. Um, the company can report on things for a fleet manager as, for example, as to whether, or how often the vehicles go over, um, go over speed limits.

[00:19:50] Tony: Um, which is not just about avoiding fines, but if you think about it, that’s a heavy use of fuel if a truck is revving up to go over. Um, the speed limit and, and there’s been reports and case studies showing that, uh, the fleet can save 20 percent in fuel costs by keeping the vehicles under the speed limit.

[00:20:07] Tony: Just getting information about that. But also things like, um, whether the cold chain storage is being optimized, um, whether. You’re better loading trucks with the stuff already refrigerated or paying the cost to refrigerate them by running the motor heavier in the truck, that kind of thing. Um, and also to just utilization.

[00:20:27] Tony: So are the drivers taking the most, the optimal, um, directions to their deliveries or, or not? So, yeah, I can see the benefit of this. Um, it’s starting to get some high profile users. So I think they list Borrell in Australia as one of their, um, One of the companies that use it may have a fleet of cement trucks, another company in Australia called Program, which I think used to be called Program Maintenance and may have been listed on the ASX.

[00:20:54] Tony: They have a company called Cisco in the U. S., which S Y S C O, not the router company, but the company that delivers, um, Wholesale food and, and equipment to restaurants, which has a big fleet of vehicles in the U. S. So it’s, it’s gaining some traction and growing. They recently did a capital raise to, um, put them on a bit of financial footing, but also to help fund expansion.

[00:21:16] Tony: So, um, that may happen again because, um, they’re, they’re pretty much running at, uh, lease and, um, Break even, I guess. A lot of the costs in this company are in R& D to improve their telematics and their, they’ve recently signed a partnership deal with Microsoft to use AI to troll through the data and give them other insights that they can pass on to their fleet managers.

[00:21:40] Tony: So, currently, I think R& D was running at about, um, 12 percent I think of sales. Uh, it’s, it’s, it’s high, but it’s shrinking as a percentage of sales, um, which makes sense. And it looks like that’s where they’ve been putting their. Profits into, which also makes sense for a growing company. So yeah, interesting company, interesting, um, what they’re doing.

[00:22:04] Tony: Uh, you can see definite uses, um, for it. Um, however, still a small New Zealand company. I think it’s market caps around 180 million. ADT for this company is, is small. Um, just try and find that.

[00:22:22] Tony: ADT is 50, 748, so it’s not going to suit everyone, it’s a small company. It’s recently gone across its 3PTL buy, so that’s a good thing. And what else can I say about the numbers? It’s just the share price for the analysis is 97. 5 cents, which is just above consensus target, um, and it doesn’t have an IV1 and IV2 because the current earnings per share was negative, so we can’t calculate, doesn’t have a yield because everything’s going back into R& D.

[00:22:57] Tony: Um, Stock Doctor Financial Health Hazard is early warning and steady. Um, that makes sense, I guess, if it’s a growing company and plowing money into its growth, it’s not going to have a strong financial position. Um, I guess that’s reflected in the current PE, which is 4, 000 times, and we can’t really score it on that.

[00:23:16] Tony: Um, but however, the PropCaf is 5. 7 times, so that suggests it’s, it is getting a lot of sales. They’re coming in but going back into growing the business or R& D research. Net equity per share, 1. 43, which is below its share price, so that’s good. NTA though, however, is only 21 cents per share, so that usually means that there’s a fair amount of goodwill on the balance sheet.

[00:23:44] Tony: And that’s probably the case because I know this company has acquired a number of companies along the way and put them together into this sort of data management, um, fleet management company. So that, uh, even though we score it for being below net equity per share, it is above net tangible assets with its share price.

[00:24:04] Tony: Um, We don’t have a forecast growth available, so I can’t score it on that, but management are calling out growth. Obviously, they’re in growth mode, so I’d expect that to be the case, but we can’t, can’t score it. So our scoring is perhaps a little low. Um, Directors only hold 2%, which I thought was interesting.

[00:24:23] Tony: Again, I would have thought to be an owner founder in a company like this, but we’re not seeing it, so we can’t score it for that. It’s a recent buy on the buy list, so we score it for that. Uh, it almost had consistently increasing equity, but I think there was one half where it went down slightly, so we can’t score it for that, but it was pretty close.

[00:24:40] Tony: So, all in all, quality is 7 out of 15 or 47%. Um, but as I said, there could be a difference. A couple of scores we could add back to that in time. QAV score is 0. 08. Uh, so just below again our cutoff of 0. 1, but um, wouldn’t take much of a share price, you know, decline by a cent or two to bring it back onto the buy list, or you just wait for further results in the future.

[00:25:03] Tony: Um, Risks for this one, I think, you know, you’ve got to call out the fact that it’s a small company based in New Zealand and it’s growing, so it’s going to find, it’s going to have all the normal risks you have buying these kinds of stocks, um, they may do another capital raise for an acquisition or to fund working capital or whatever, um, so that’s, that’s always on the card with these companies, uh, it does seem like though that that’s been paid back because the share price is up, Since the raise was done, um, I think probably the biggest risk that I can see for a company like this is barrier to entry.

[00:25:38] Tony: So, like I said, those, those vehicle monitoring units were being used by the insurance companies in Canada and North America. Uh, looks like it’s a similar type unit that they’re selling. So, if the units are readily available, then it’s really comes down to how good is their, um, fleet management intel, I think.

[00:25:59] Tony: It does do other things, like it does sell dashboard cams and allow, um, you know, incident review. If there’s been an incident, they can review the video recorded from the dashboard cam. But again, they’re also readily available in the market. So I think the real IP for this company is on how good its, um, fleet management intel is.

[00:26:18] Tony: And, you know, you wonder how long it would take a U. S. company to reverse engineer that. Um, and go after that market as well. So that, I think that’s probably the biggest risk for this company. Um, you know, if they are well established in the market and they are, they seem to be that they’re getting like a 90 percent plus, uh, re sign up from companies that use their service.

[00:26:39] Tony: So that’s a good thing. But you wonder how long it would take for someone else to come into the market with similar sort of software, um, using units they can probably buy cheaply and send out to cars and, uh, and fleet managers for their, for their cars and trucks. Uh, and then start to develop their own fleet management Intel as well, perhaps using AI.

[00:26:58] Tony: So yeah, it’s certainly worth looking at, but it has all the usual sort of small company risks associated with a growing company like this. So that’s E Road.

[00:27:10] Cameron: How big their moat is, in other words. Yeah, that’s right. How big is their moat? Thank you, Tony. Yeah, they’re, uh, been a good performer, um, in my portfolios.

[00:27:21] Cameron: I added them to one of the light portfolios just on the 22nd of November and it’s up 36%. Since then, a little bit less than a month, added them to another portfolio on the 7th of, uh, December. One of the Stockopedia portfolios, up 7 percent since then, but, um, yeah, yeah.

[00:27:41] Tony: And that’s why they’re probably off the bottom of the buy list now, because the price has had a run.

[00:27:46] Cameron: Okay, back to me in the booth. And now I’m going to get into the best of clips from this year, as selected by my best friend, ChatGPT. This first clip is from early in the year, episode 604, and it’s me having a conversation with Tony recapping his view on ethical investing. It’s something that comes up in the questions or the comments at least once a year.

[00:28:10] Cameron: So let’s have another look at Tony’s view on ethical investing. And for new listeners, maybe we should just recap your personal view on ethical investing. We obviously talk about. Coal companies, a lot on this show, we invest in a lot of coal companies. I know that personally, you would be happy to see us move away from fossil fuels to a fully green, sustainable, you’re, you’re a, you’re a Labor voter, you’re an old lefty.

[00:28:41] Tony: I’m a swing voter, but yeah.

[00:28:43] Cameron: Are you? Do you swing? Yeah. Okay. Well, didn’t you used to be, uh, shouldn’t you used to be a union, uh, union leader, student union leader,

[00:28:52] Tony: Tony? I was. A student union leader, yeah. But I couldn’t bring myself to vote for someone like Bill Shorten, so I voted for the other guys. But, um, yeah, I swing.

[00:29:00] Cameron: Okay, Tony’s the swinger, ladies and gentlemen, you have to

[00:29:03] Tony: go first. Around the centre, I’m definitely, my politics are definitely in the centre. I make my money out of, out of being a capitalist and I try and do all I can for the, for uh, certain causes, but um, but yeah, that’s my politics. But

[00:29:18] Cameron: you invest in coal, explain for the new listeners, if you wouldn’t mind, just your, your moral evaluation

[00:29:25] Tony: there.

[00:29:26] Tony: Yeah, well, my argument on holding coal shares is that, you know, if someone can tell me how it benefits the environment for me not buying coal shares, I could be swayed, but no one’s ever been able to prosecute that argument successfully with me. And chances are I’m buying those, those shares from someone who wants to sell them because they are persuaded it’s unethical.

[00:29:48] Tony: But it makes no damn difference to the environment whether we hold the shares or not. Because, uh, holding the shares is money changing hands between shareholders. It’s not the money going to the company. Now, it’s different if they did a rights issue and, and, you know, whether we took it up and helped them to buy a coal mine.

[00:30:03] Tony: You know, I might think twice about that. Probably would. But yeah, I mean, I think climate change, if we just focus on that particular ethical issue, climate change has to be a top down imposed solution, a government regulated solution, because it’s not going to be sold by the market. It’s a tragedy of the commons type issue where, you know, that classically was people overgrazing their sheep on the common village land and the farmers were never going to stop doing that, even though every year one less sheep could graze because they were eating up all the grass and killing it.

[00:30:35] Tony: It had to be the, the Lord Mayor came along and said, nah, nah. Enough time out, you know, there’s only going to be 50 sheep on this common lawn from now on, um, we’ll decide who goes. So that’s how I think that plays out. But everyone has their own personal ethics as well. Like I, I’m happy investing in gambling companies, even though I know that there are people who, you know, whose lives can be affected by it, but, um, I gamble.

[00:30:59] Tony: So I’d, I’d feel a bit hypocritical not doing that. Um, so everyone’s got their own personal ethical red lines. For me, that red line, I’d be. I wouldn’t want to invest in a cigarette company, for example, but I know that Buffett did at some stage and there are strong economic reasons for it. So I see my role as an investor, first of all, to provide for my family’s future financial needs.

[00:31:22] Tony: And even though I do think about the impacts of that and the ethics of it. It doesn’t stop me from buying shares in coal companies, for example, or oil companies.

[00:31:33] Cameron: Because when the ocean levels rise by a couple of meters, your family will need, uh, bunkers in New Zealand to go and hide in when the, uh, global apocalypse happens and, uh, with all the other Davos people going and living in New

[00:31:47] Tony: Zealand.

[00:31:48] Tony: I found some bunkers in Tasmania when I was playing golf down there. Did you? Yeah, there you go. Good. Yeah, if the ocean rises, we’re up 38 floors here, so it’s not gonna be too bad. Yeah, you,

[00:31:58] Cameron: you won’t be able to get to your restaurants to have dinner, but they’ll be underwater unless they’re also on the 38th floor or something.

[00:32:05] Cameron: Maybe you can just get the chefs to move in to the spare bedroom, cook

[00:32:08] Tony: for you. Yeah, but like, like I said, having said all that and joked about it, and I, and I agree with it, how does me not owning shares in Whitehaven Coal Stop it. Because the

[00:32:18] Cameron: shares, I mean, the money’s already been raised through the share issuance.

[00:32:22] Cameron: The shares are already being traded in the marketplace. If you buy a share, they don’t, the company doesn’t get any of that money. It’s the people, the individual or the fund or whoever who’s selling the share that you’re buying it from that gets your money. Uh, the company doesn’t, the coal company doesn’t get your money to build new coal mines, et cetera, et cetera.

[00:32:42] Cameron: So

[00:32:43] Tony: That’s right. And you could make the argument I’m living off the proceeds of an unethical company because I get dividends from them and I accept that. Maybe I’ll put those dividends and don’t give them Donate ’em to GRE to Thunberg or something. But that’s a different argument. Living off the proceed is different.

[00:32:57] Cameron: We’ve talked before about, well, if you wanna really drill into the ethics of every company, correct. And you look at the amount of petrol that their trucks or their fleets of cars or their ships use and. The damage that the amount of electricity that they use to run their buildings and the telephones that they use that are built in sweatshops and China.

[00:33:17] Cameron: And it’s a rabbit hole once you get into that, which we did when we were writing the book, you start to pick at these ethical issues and it’s, you know, it’s very, very, it’s going to be very, very hard to find anything that gets a clean bill of health that you can invest in. So then you need to start making decisions about, well, where’s the line.

[00:33:34] Cameron: What unethical behaviors am I willing to invest in versus which ones am I not? And it’s a whole minefield to get into. Not that people shouldn’t do it if they feel minefield.

[00:33:46] Tony: It is a whole minefield. Yeah. I’m not, I’m not forcing anybody to do what I do. I’m out there trying to help people do it, you know, invest better in my opinion, or do it my way, but I’m not, not forcing them to do it.

[00:33:59] Tony: And yeah, I mean, like the kind of flip side of it is don’t invest because most companies are going to have a, you know, something out there, which is going to be a negative in terms of the ethics of them, like you said. And so what do you do? Become a farmer. And then if your kids grow up and don’t get the education or opportunities that they deserve, then is that unethical?

[00:34:19] Tony: So there’s a real fine balance here in how you, how you think about things and how you put them into practice. Well,

[00:34:25] Cameron: you can’t be a farmer because your cows are farting methane into the atmosphere, which is bad. And then you should actually be planting trees on that land and not crops because the trees are absorbing the carbon in the atmosphere.

[00:34:37] Cameron: And so, you know, you can’t do that either. You just have to live on air, become one of those air people.

[00:34:43] Tony: Yeah, I would take the David Markham point of view that we shouldn’t be having kids because mankind’s, man’s bad for the planet, which is, you know, there’s some sympathy for it, but I’m not gonna abide to it.

[00:34:54] Cameron: He seems to fly around the world a lot on planes that, uh, get started on our friend David Markham. Alright, well the next clip that GPT selected is from episode 644. This is one that we recorded, uh, the 31st of October. So, only a couple of months ago, and this is Tony’s pulled pork on DTL Data 3. ChatGPT said, this is an insightful idea with the exploration of the merits and risks associated with technology companies, particularly IT companies in the investment landscape.

[00:35:34] Cameron: This topic is addressed through an in depth analysis of Data3 Limited, a Brisbane based IT company. The discussion highlights the unique challenges and opportunities that IT companies present for investors, such as high return on equity, potential growth in areas like AI and concerns over high payout ratios and the reliability of operating cashflow as a metric in technology companies.

[00:35:58] Cameron: So let’s jump to that and see what Tony had to say.

[00:36:02] Tony: So the pull pork today is on a company called. Data3, DTL, and it’s an interesting one. We don’t often get technology companies on the buy list. Yeah. So that’s one of the reasons why it caught my eye, but it is a large ADT stock. It’s a Brisbane based IT company that’s been around for a very long time.

[00:36:24] Tony: I think it was founded in 1977, listed on the ASX 20 years later in 1997. And it’s one of the larger homegrown IT companies. I mean, um, There’s a fair bit of it work being done by the big accounting firms, the, um, PWCs, et cetera. But, uh, this is a dedicated large IT firm. Um, it crosses the whole, um, waterfront on it.

[00:36:49] Tony: It’s, uh, it, uh. offers cloud hosting, uh, helps out companies with IT security and it does a lot of work on IT solutions. So consulting and sales, transformation projects, uh, services, data analytics, et cetera, et cetera. Um, it’s a, it’s a large IDT, ADT stock. So it trades about, um, where’s my numbers? 2. 49 million per day.

[00:37:17] Tony: So it’ll suit a lot of people. It’s not quite. Over at second buy line. So it’s a, it’s a technically a Josephine at the moment, but it’s getting close to a buy. Um, and it’s way above it’s, uh, it’s buy. Uh, but it’s, it’s interesting. So I was kind of intrigued by it. Um, I have a IT background, so it caught my attention.

[00:37:39] Tony: Uh, Really good numbers. When I went to do some analysis on this, the FY23 results saw that the revenue was up 17%, gross profit was up 15%, MPAT was up 22%. Um, there’s lots of recurring revenue, so 65 percent of revenue is recurring. So that’s all really good, and looking back over the last sort of, I think they put 6 years in their, in their, uh, information, in their pack, uh, the growth has been consistent for the last 6 years, and the company claims to have, uh, increased revenue by 15.

[00:38:18] Tony: 3 percent CAGR over the last 6 years, so it’s, it’s, been a growth company, so it’s kind of surprising to see it on the buy list because we don’t normally get this kind of company on the buy list. Um, going through the numbers, it’s, uh, share price I did the analysis out of 6. 94, which is just slightly less than consensus target.

[00:38:42] Tony: If people are interested, the ROE on this company is 57%, so return on equity is very, very high, which suggests that it’s mainly a capital light business, as a lot of IT companies are. Oftentimes, they’re Biggest cost is people and there’s some 1, 400 staff working for this company as well. Now, I, I was intrigued by the payout ratio on this company, which is, uh, 90, 91%, so most of the profits are being paid out in dividends.

[00:39:10] Tony: However, the yield is only a little over 3%, so we can’t score it for beating the, the bank debt rate, um, or the mortgage rate on that basis. Uh, And I’ll come, I might circle back and come back to why that’s an interesting stat in itself. Uh, but it did, uh, did catch my eye. So I can’t score it for high yield, but I will talk about the payout ratio in a minute.

[00:39:32] Tony: Um, the PE is very high. It’s 29 times, which is, you know, way above what we normally see on the buy list. However, it is the lowest PE for this company in three years. So it scores for that. Um, Stock Doctor Financial Health is satisfactory and recovering. So it gives, uh, Um, points for those two things.

[00:39:53] Tony: Recovering especially I like. Uh, but the PropCaf, sorry, the PropCaf for this company is 3. 69 times, which is a bit surprising given the PE is 29 times, but um, certainly throwing off all the PropCaf, and I’ll come back to that one in a minute too. IV1 and IV2 are way below the share price. So IV1 is 1. 22, IV2 is 2.

[00:40:16] Tony: 67, and the share price is 6. 94. And likewise, so is net equity per share. It’s um, 0. 44, so it’s nowhere near the share price. So we can’t give it a score for that or for book plus 30%. Earnings per share growth forecast is 13 percent which I thought might be a bit conservative given the growth the company’s been getting over the last five or six years but that’s what the analysts are saying.

[00:40:42] Tony: But growth over P doesn’t meet our 1. 5 threshold so we can’t score it for that because the P is too high. I did think this might be an owner founder company but it’s not. However, directors hold 3 percent which isn’t too bad. Interesting, um, interesting history. Looks like the founders are out, um, they’re probably going back to 77 when they founded the company.

[00:41:02] Tony: Just as an aside, it’s the history of the company is it’s, um, uh, one of the original, I think, IBM resellers in Australia and it merged with a, I think, a typewriter. Vending Company, so perhaps an IBM typewriter vending company back in the 70s, and formed this company, and then they decided to, uh, jazz up the name, because I think it was called PCA originally, or PCA Partners originally, and they called it Data Hash 3.

[00:41:32] Tony: Because, uh, that was the year, when they changed the name, that was the year that IBM released personal computers that had a hash above the 3, so you pressed shift 3 and got a hash, and they thought that was the, a great, you know, great move forward in technology, and they’d show themselves to be, uh, Uh, on the cutting edge of trends in the IT industry, and so they call themselves Data3.

[00:41:55] Tony: Uh, yeah, interesting story. Anyway, um, in terms of manually entered data, it’s not a recent upturn. It’s been, been traveling quite nicely, as you’d expect with that sort of growth pattern over the last five years. It gets a zero for consistently increasing equity, although it was pretty close to, to six halves of increasing equity, just slightly missed out on one.

[00:42:16] Tony: Um, all in all, quality score is 10 over 15, so 67%. QAV score of 0. 18. However, let me just run through some of the interesting parts and I put this in the risk section. The dividend payout ratio is 91. 4 percent and I’m, it’s not on the checklist as a metric or it’s not a red flag, but it is a risk I think when a company’s paying out such a high amount of profit as a dividend, uh, I guess you can read it as a positive or negative, I tend to see it as a negative because if they have a downturn, if there is like a recession next year and the profits go down, the dividend goes down and if people are holding the stock to obtain a dividend, then they’ll sell it, which will depress the stock price even further.

[00:43:05] Tony: So, yeah. I think it’s an issue when a company pays out that much of its profit as dividends. I guess they’re doing it because they don’t need to invest that much in the business. Sometimes companies in this situation keep more on their books and then they look for M& A acquisitions, so that’s Something they perhaps could consider, but yeah, it’s, it’s a risk.

[00:43:28] Tony: And, and I’m reminded of the time many decades ago when Telstra was a blue chip company, or still is, I suppose, but was a, was a darling because it was paying a, uh, an above market dividend yield, fully frank, and people were buying Telstra stock when they retired and living off the dividends for years and years, not really caring what happened to the share price or who was running the company or what it was getting into, um, but relying on that dividend.

[00:43:52] Tony: And eventually years. Telstra’s profit became more challenged. The dividend payout ratio had to keep climbing because profits were decreasing a little bit. Payout ratio was increasing to attract people to keep the share price up to buy the stock. Uh, and eventually it got into the comical situation where Telstra was borrowing money to pay their dividend.

[00:44:12] Tony: So the profit wasn’t covering the dividend and obviously you can’t keep Doing that forever and eventually it all came to an unhappy end and a bit of a mess. So whenever I see a payout ratio so high, I’m a little bit skeptical and call it out as a risk. Um, the other interesting thing about this company, and I guess, you know, my brain was picked by the fact that it’s a high PE company, um, but it’s coming up as good price to operate in cash flow.

[00:44:40] Tony: Uh, And it’s, it’s failing on the other valuation metrics like IV1, IV2 and, and Net Equity Per Share. So, something was going on there and I did a bit of digging. It looks like, in this case, operating cash flows is often affected quite a lot by supplier payments. So, this company, I think, does about 2. 5 billion worth of sales.

[00:45:05] Tony: I’ve done some back of the envelope analysis on some numbers, so they may be out. But they’re sort of directionally right. Looks like about two billion of that comes from hardware. So they’re buying equipment from IBM, et cetera, and then installing it and selling it to companies that they’re doing IT consulting work for, or other IT work for.

[00:45:26] Tony: And so they’re making a very thin margin on that. But depending on the trading terms, when they get the money from the client and to how long it takes for them to have to pay IBM, Uh, that can come look like operating cash flow because it’s receipts from clients but it hasn’t been paid out to a supplier and I think that’s inflating the operating cash flow this particular half because last, last half it was negative 22 million dollars so, um, some, I’m not sure this is a QAV stock, I’m not sure we can rely, I don’t think we can rely on operating cash flow in this case, uh, I’m not saying it’s a bad company or I’m not saying it’s um, it shouldn’t be bored if people are interested in a growth company.

[00:46:07] Tony: It’s got a reasonable quality score but I think the operating cash flow here is, is not what we intend it to be. In other words, a good indication of how, how um, you know, cash generative this business is. And digging down a little bit further, it’s kind of two businesses and management do call this out in their presentations and the business split is important however the accounting doesn’t.

[00:46:28] Tony: Split things into business units. It just operates at the company level. So, well, the statutory accounting does anyway. It looks like, uh, like, like I said before, about 2 billion of the 2. 5 billion in sales is IT hardware. And they’re making about, you know, sort of a very low margin on that, maybe 1 to 2%. Um, but the rest of the business, the other, uh, sort of 350 to 500 million in sales, maybe 350, I think was the number I pulled out of their figures.

[00:46:55] Tony: Uh, looks like it’s. The people business. So the sort of business that, um, we like to see with IT companies where, uh, there’s a low investment, low capital, um, high ROE and great margins. And so, you know, if you try and split that up and take the prop calf from the consulting business and the, and the other parts of the business, which aren’t it sales hardware, sales.

[00:47:20] Tony: And then the PropCaf blows out to be more like the PE, so I, again, I haven’t done the detailed number crunching, I would guess it’s going to be sort of in the 20 to 30 times ratio, sort of equivalent to what the PE is, which is 29. 4, so yeah, I don’t know. Look, I’m not going to say don’t buy this company.

[00:47:39] Tony: I’m not going to say buy it, which I never do anyway. But this is one case where the PropCaf isn’t giving us the whole picture. Looks like it’s a good company. It’s had at least six years of constant growth. You’d be happy to know, Cam, that they’ve highlighted AI as being a particular area of growth for them.

[00:47:58] Tony: And all of their clients are asking them how can they use AI in their business in every sort of aspect. Security, um, uh, network. Routing, um, all sorts of different things. So, uh, transformation, business, um, business process flow, all that kind of thing. So, uh, I’ve got no reason to think the growth won’t continue, but I’m just going to caution people to, um, do a, do some research themselves.

[00:48:24] Tony: I don’t think PropCaf is a good measure for this company.

[00:48:29] Cameron: DTL. Thanks Tony. A friend of mine, a business partner of mine was like the marketing director there for quite a few years. Okay. Yeah. They’re, they’re thinking, cause I think they’re based up here, based in Brisbane. They are. Yeah. Based

[00:48:46] Tony: in Toowong.

[00:48:47] Tony: Yeah.

[00:48:50] Cameron: Good stuff. Yeah. Well, I think, um, AI is going to have a dramatic impact on IT. Businesses and how clients use IT in particular in the next few years, already starting to see that flow through. There was an article in the Financial Review last week that I referenced in my Futuristic Podcast on Friday, basically saying that it’s, uh, that AI and the impact of AI is one of the top three concerns in every boardroom in Australia right now.

[00:49:21] Cameron: It’s what every CEO is thinking about and talking about. How do they navigate this? What this, what is the impact going to be on their business, et

[00:49:30] Tony: cetera, et cetera. Yeah, I think that’s important, but I take it with a grain of salt as well, because every year they publish that kind of survey, and what are the top three things that CEOs are thinking about, and you know, one year it’s ESG, one year it’s Internet of Things, one year it’s Afterpay, it’s like, buying our paylaters, there’s always some kind of fad they’re focused on.

[00:49:50] Tony: I’m not, not saying AI won’t be important, but that’s not perhaps the best indicator of how important it will be. What is a good indicator? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Yeah, I don’t know. I guess we won’t know until after the fact, usually. I mean, there’s always a lot of hype and bubble around these kinds of things. Yeah, that’s true. I suspect, I suspect the next thing we’ll see will be job losses, which is what, you know, going back to the sort of 80s when I started working and IT was becoming more and more of a thing.

[00:50:19] Tony: Um, moving from the mainframe to smaller computers and, um, the applications were easier to code and maintain and things. And we started to see less clerical staff, for example. That was a, you know, kind of a, I guess an indicator that it was actually having an impact on business. Hmm.

[00:50:37] Cameron: Yeah, one of the things that everyone is predicting as being one of the first casualties will actually be developers.

[00:50:45] Cameron: The ability for ChatGPT and BARD to write code now is pretty impressive. It can write Massive chunks of code, and you know, I’ve spent a lot of time getting it to write code for me over the last couple of months. Um, it’s not perfect, uh, and there’s a lot of debugging to be done and that kind of stuff, but I think it’s going to get better at those sorts of things.

[00:51:08] Cameron: I think its ability to replace, uh, a lot of the work that coders do, whether or not it replaces coders, is another story, you know.

[00:51:19] Tony: Yeah. Yeah, I think that’s, it’s going to be a great productivity tool, if nothing else, I think. Hmm.

[00:51:24] Cameron: Hmm. Hmm. And Tony will be happy for me to report that since he did that recommendation, I, uh, did buy DTL, uh, a couple of packages, actually.

[00:51:37] Cameron: First was at the beginning of, uh, November, 8th of November, second, uh, was in, uh, 27th of November, and the third was on the 12th of December. Anyway, the first one is up about 12 percent since we bought it at the beginning of November. So, uh, yeah, DTL has turned out post pulled pork to do quite well, no complaints there.

[00:51:58] Cameron: Well, that is episode, whatever this is, 652, I think, and, uh, I hope you enjoyed that. I’ll be back next week, first week of January, with another best of episode, another pulled pork in there as well. I hope you all have a safe and happy New Year’s Eve. Stay out of the storms, don’t drink too much, don’t do your liver too much damage, and let’s hope that 2024 is a better year on the markets than 2023 has been.

[00:52:30] Cameron: Take care, guys.



In this episode, Tony provides insights into recent retail sales figures, the market’s reaction, and the concept of ‘confession season’ in the corporate world. Then he conducts a detailed ‘Pulled Pork’ segment on Stealth Group (SGI), a tool retailer, evaluating its financial health, market performance, and prospects.

In the club edition, we also discuss the reasons behind varying member performances (and our own performance), and discuss the importance of sticking to a disciplined investment model.

QAV 721 – Dr No

In 721 we discuss the pain of FND, why Aussie investors keep investing in unprofitable companies, and TK does a Pulled Pork on SRV.

In the club edition only: the myth of the ‘new normal’, why LIC AFIC is selling below its NTA, how Aussie investors can benefit from the AI boom, what we should do about copper prices being up, how to interpret the number of buys going down, how often is TK is making purchases based on factors outside the numbers, and how to interpret the resignation of the PRN CFO.


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