EP.28 - Too many opportunities

 In this episode, David Creighton (Chair of the BT Advisory) and Paul Beattie (Managing Director and Co-founder of the BT Global Growth Fund) discuss the challenges of navigating an overheated market with an abundance of compelling investment opportunities. They explore surging semiconductor valuations at historic extremes, massive inflows of capital from Japan and the Middle East into U.S. equities, and their disciplined approach to selling winners and cutting losses without ego. They also share insights into their fund management philosophy and highlight emerging hypergrowth opportunities in healthcare and specialty apparel. 

Transcript

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Welcome back to the BT Global Perspectives podcast, where we probe into today's investment strategies and have a look at what's coming over the horizon. In Montreal, I'm David Creighton, chair of the BT Advisory Board, and I'm with Paul Beattie, the managing director and co-founder of the BTE Global Fund. Before we get going, I'll invite you to peruse our disclaimer, which can be found on the BT website. Good to see you, Paul. Good to see you. Before we dig into it, I just want to maybe split our discussion into uh two sections today, starting out with a normal review of what's going on and some of the crazy things in the market and some of the challenges that you've got. But I'd also like to take a moment to talk about the machinations of managing uh the BT fund, specifically how investment decisions are made and uh executed. So with that in mind, um first of all, I also just want to swing back on uh a couple of points that we made when we last got together uh last month. And one of the things we were kind of berating the Canadian government for the creation of this new sovereign wealth fund. Um, but I think that what we really did is we just said that the uh the name Sovereign Wealth Fund isn't appropriate for what it is they're trying to do. And then you've heard they're backing off on it uh already. Yeah. Yeah. Well, of course, it's so obvious. It should be called the sovereign debt fund, right? All financed with our children's money if they're borrowing, right? So But you know, the United States has done the exact same thing. They took the old OPIC, which is the overseas private investment corporation, which was sort of dawdling along with $10 billion of capital or something like that, bumped it up to $200, put Leon Black's son in charge, and you know, now it's just uh an investment fund. Right. But they don't call it a sovereign wealth fund. So it's it's kind of the same thing. Trevor Burrus, Jr. Yeah. Well, I I don't think they have a choice in Canada because the Americans are getting aggressive in uh all sorts of areas, right? They uh the U.S. government is is putting up capital uh for infrastructure building, for mining. They there's a company uh I heard last week. Um I think they need two uh they need $3.4 billion to get uh a mine uh uh up and running. And the uh U.S. government just announced that they're gonna give them $2.9 billion of it. Thank you very much. Here you go. Uh get started. Yeah, next. Trevor Burrus, Jr. What else do you need? Aaron Powell So what do you think they're gonna do in Canada? They have no choice. Yeah. So uh I think they I think the government's gonna finance all sorts of projects, right? Yeah, they've got to. One of the other things that we talked about was sort of the general theme uh last month was that you were unsure about what was going on in Iran. We've got uh uh Kuzma discussions um coming up uh supposedly by the 1st of July. So you're taking a little bit of money off the table, but you did have the caveat uh saying that you know we're taking money off the table, but I find it tough not to because there are just so many great investments out there. That's the thing. We're we're still well uh anyway, the the the tech market in the U.S. to pick a a subsection of the of the of the markets. I mean, it's it's still ripping, right? It's like it it just doesn't care what's going on uh in Iran and uh the straits of Hormuz are irrelevant and and life is life is good. I mean uh stocks is I mean, that micron technologies I think the stocks up tenfold in the last year. Uh Dell Computer was up, I don't know, four or three hundred percent. And then last week it went up another 50 percent. Just for fun. Just for fun. And so uh wow, a lot of wealth creation south of the border. So maybe I can segue into a cool um little statement that I saw. And uh one is that the SOX index, which is uh the semiconductor firms, is up more than 60 percent since January. So that would make sense. And is trading this staggering 62 percent above its 200-day moving average, right? Which is the biggest deviation of any market mania since the Mississippi bubble of 1720. Put that in your pipe and smoke it. There you go. And uh I I got sent a um uh you know from a technical analyst uh uh who we like very much, uh sent me 50 uh slides today, charts today of stocks that are breaking out and look to him to be going much higher. So he's basically saying buy all of these stocks. And it's not like one or two or three or five, it's fifty. Yeah. And uh lots of household names and you know, big corporations. And uh so I mean, uh I think this this market is uh is is still up and to the right. But remember six months ago, again, just looking in the rearview mirror, we were talking about bubble. Everybody was talking about bubbles. Yeah. And then we kind of stopped talking about it. Yeah, it's tough to pick the the end of a of a of a raging bull market. Very, very tough to pick the end. I'm not sure what's gonna do it. I'll tell you, you know, the IPO is coming up, right? Uh uh what's that uh SpaceX is going public. They've confirmed uh the valuation, 60% of the valuation is Starlink. Okay? That's their only profitable business. Everything else loses money, and a lot of its businesses don't even have revenues at all. Uh anyway, $2 trillion valuation, 60% of the value is in uh in uh in SpaceX uh or in uh what's it called, Starlink and uh and and TelSAT, right, is uh the Canadian version of Starlink. Uh it trades at a valuation of about six billion enterprise value, US. So less than 1% of the value of Starlink, and it's a direct competitor. And it's going to be the next constellation, Leo or low Earth orbit satellites, it's the next constellation to be in business. So how do uh how do they not benefit from Starlink being such a big success and having so much value? How do they not get recognized at 1% of the value? I mean, uh I think we all know that every government around the world that's gonna use Starlink, the military is gonna use Starlink, uh all sorts of corporates, uh, you know, lots of big boys are gonna use Starlink. All of them are gonna want redundancy. They're all gonna want a backup plan. You think they're not gonna call uh another satellite uh company that's up and running? And by the way, uh we've been told Telsat's technology might actually be superior to Starlink's. Well, I think that's happening. I mean, you're you're hearing about, and obviously on a much smaller scale, but the the you're hearing about a bunch of new satellites going up for different countries because of just that. They they want to have a backup plan. Aaron Ross Powell For sure they want a backup plan. Well, uh Telsat's gonna be offering their services to the world, and they got six billion valuation. I don't know. I we like it. By the way, it's grown to now it's our top position in our in our fund. Not because uh we're geniuses and we bought it uh yesterday because we know it's going up, but we bought it two years ago and uh it's tripled. And uh David McFadgin over at uh ATB, I think he's probably the top analyst on it. He thinks this thing could go up uh four or five fold from here. So anyway, very interesting times. But nobody's talking about any downside anymore. Right. So we all know where this is gonna end. This is gonna end one day. It's just none of us are smart enough to figure out uh when. Another pool of capital that's coming to the market is Japan, up until recently, the second largest economy in the world, massive saver, also massive uh government debt. But one of the interesting things, and the reason that Japan is able to weather all kinds of different storms is that uh that debt is all held internally. So Japanese households are savers, and they do that all through the post office, which is just this massive account. They are now starting to sell bonds, JGBs, Japan government bonds, and start buying stocks. And that's just like in my lifetime, it hasn't happened, and now it is. So another wall of cash that's coming out. Uh the challenge on the other side is um what's gonna happen to the bond market? And we've already seen JGBs hitting new highs and and that sort of thing. So there's some challenges there, but the equity tour, I guess, is gonna continue to run. Aaron Powell And how many I mean, how many trillions of dollars came out of the Middle East in the last month and went into the U.S. stock market? I mean this might be one of the drivers. The whole world is going to the U.S., you know, for safety and uh and to make returns, right? Yeah. Trevor Burrus, Jr. Safety. With that in mind, let's shift over to the the second topic that I wanted to touch on. That was just how you and Jacques manage your funds. And the the reason behind this is that uh my old partner, Carl Otto, who was uh asset manager for most of his career, um, had uh shared with me a study that had been done on asset managers and their ability to actually sell stocks. Anybody can buy, it's pretty easy to buy, but selling at the right time or within a band is the tough thing. And what is interesting, it's just an overlay, is that female asset managers tended to be better than male asset managers because they don't have an ego, they're willing to just get rid of things when they're down. They don't say, oh, you know, I'm I I don't want to be proven wrong, I'm gonna hold on to this thing, which is the wrong thing to do. I mean, the uh the theory of asset management is first of all, don't lose money. So uh you know part of your success has to be what the thinking is around selling. So Well, it's interesting. Uh you know, Jacques and I started this uh 20 years ago, nine well, nineteen and a half years ago. Um and uh, you know, two different personalities, two different uh ways of looking at things, uh both finance professionals. In 20 years, we have never had an argument over a stock. So uh because why? I mean, uh of course you you disagree on things, but you don't have an argument over because in this game, uh if you're right 60 percent of the time, you're doing very, very well. Uh nobody's right more than 70 percent of the time. Yeah. Nobody. Never has been, and uh even the best. So so that means you're wrong 30 percent of the time minimum. So you make mistakes all the time. So what's the point of getting mad at your partner about them making a mistake when you're gonna make one the next week? And uh and so we've gone all these years without uh really it's amazing when it's like no confrontation on on on on stock picking and and strategies. It's because you know you're all in it together, right? And um and you make mistakes all the time. So when it comes to, you know, you find winners, anybody can buy a stock and and watch it go up. Uh if you get lucky, it goes up tenfold in two years. And uh maybe there's a good chance you never even knew what the company was up to. I mean, it's just pure luck. Well, anybody can do that. Um you know, what happens when there's volatility? What happens when you make a mistake and you're wrong 40 percent of the time? Well, you're making lots of mistakes. Anyway, we we don't we sell our mistakes all the time. We don't know you we never like to hold on to a stock at you know, ten dollars, watch it go to five, think you're right, the market's wrong, double down, watch it go to two fifty, think the market's absolutely crazy, and load up. I mean, that is the most foolish investment strategy there is of all of them, averaging down. Aaron Powell So we were talking before we got together about MDA, which has been one of your favorites for a long time, and you're starting to sell that. Yeah. I mean, that's that's one of those great, you know, companies we met uh two and a half years ago. Uh we loaded up, we went to a full position, you know, 5% position, and uh watched the stock uh go up four, four or five full four or five fold. Um the problem is now, back then it traded at eight times EBTA, seven times EBTA, and it's a world-class company. Uh and uh growth, lots of growth uh in the space uh sector. Unique stock, and uh uh and orphan stock, as we call them, uh traded only in Canada. It's perfect for uh finding an undervalued situation. Of course, it goes up fivefold, but now it's trading at 23 times next year's EVITA. So you just thought that was toppy? I don't know. I think uh I think look, 45% of our fund right now today trades at less than four and a half times EVA DA. So we've never had we've never owned so many stocks that trade at such a low cash flow multiple. So uh, you know, sell at 23 and let's uh let's buy some at uh three. How's that? Um uh so that one we're lightning up. But it it's not that difficult to do, you know, uh that kind of thing. What happens when the stock falls? Uh you buy it, uh let's say you pay $10 for it, and and three weeks later it's trading at $7. You've totally mistimed it or made a mistake, whatever. What do you do? Jacques and I don't mess around. We're like, we're wrong. Market's right, we're wrong, we're out, and we take the loss and and move on. Because it's just what are the odds of this thing, you know, going back to $15 without first touching five? And we we you know, just sell the whole possession. Yeah. Well, if we don't know this, you know, if we're newly into a stock and we make a mistake, uh let's just make the mistake and and move on. If uh there's uh GoEasy is a company we owned 18 years ago. Right. And uh we bought it $7. We wrote it, it got as high as $230. Uh now you can pick it up for uh $50. And uh the company, by the way, is four times larger. Uh it's trading right now at six times earnings. If the company doesn't grow, if it just stops growing and management decides to slow down just to get their get their act together, they made a they stumbled on a few things and the stocks have been killed. Uh they lend money to everybody uh uh in Canada that the banks will not touch. Right. Right? So if you don't own real estate, the banks aren't going to lend you a whole lot of money. But uh but how many entrepreneurs and and and uh uh uh more struggling people need, you know, they don't own real estate, but they need uh they need loans. So anyway, they've got a big book, about $8 billion. It's a it's a good sized company. Um the stock now trades at between six and eight times earnings. Uh and we've owned it for all these years. We sold it uh uh uh way back at $150 uh dollars. We didn't write it all the way down to this last um uh range. So uh well we did I guess we did own some because we never sold it all, but we we we sold the vast majority of it because it was uh uh really cascading. Um but now we've we've reloaded because uh we've assessed the risk, we like the story. Uh we do like management, we think they know what they're doing. Uh they just stumbled. Anyway, there so we we're loading, now we're discussing how much to buy because we think this you know, no stock uh in the finance world should be trading at eight times earnings, uh I don't think. It's a growth company, by the way, still. So um anyway, it's uh so before we have to pull the plug, um just with your experience of managing over the last 20 years, what would you say has been the mistake that you've learned most from? Well, we've made so many mistakes. But um I don't know. Listen, it uh you have to it's it's great to run money professionally. It's great to be long short. If you're not long short, I don't think you can do what we do. Um and you can't do that in your own portfolio. So my personal portfolio, Jacques's personal portfolio and our RSPs or whatever, isn't doing as well as the fund. The fund just has so much more it can offer, right? We get invited into deals. So we uh we do a lot of work and looking at new opportunities. Uh did one this morning, right? Uh they priced it uh the stocks trading at a buck fifty and they priced the deal at $1.35 and invite institutions in, and we like the story, and then we get a chance to buy in below uh below uh uh what it was trading at, you know. So we leap on these things. We short uh stocks, we're short Walmart stock. Everybody, you know, it's crazy. Why are you short of Walmart? Well, it trades at 50 times earnings, okay? You think Walmart's gonna surprise us with uh earnings being up 30% uh in a given quarter? No. In fact, they disappoint in uh this anyway, the stock stock's been suffering. It's been a it's been a good short. Um so long short, uh no leverage, right? You've you've got to be in at least five different industries. So if you're gonna get into the business of managing money, you better you better decide that you want to become very knowledgeable about you know, minimum five, and we've chosen our five. It's the same five we've had since we started the fund, you know. Um uh you got to be excited about the the opportunities. I mean, our big opportunity right now, we've talked about those silver companies that are restarting their businesses in the next 18 months. A lot of these things are trading below two times EBITDA. Some are trading at one. I listened to Eric Sperda over the weekend on his podcast. He said the same thing. He says, I am buying companies that are trading at one times cash flow. Like, how is that possible? And you know, this guy's uh multi-billion. I think he's worth 20 billion now. Uh so we're gonna have to leave it there, I'll call it. Give us something to talk about before the month is over and we've all buggered off for the the summer. So I want to leave you with two uh two things we're all excited about. Okay, hyper growth stories. Okay, right? Uh these are these are why we're anyway, we've we own five percent positions in both. So we're we're biased, we're long and strong and like it, but hypergrowth, right? So there's this company, Nurse Hydrate Technologies. Uh these guys are gonna announce actually tomorrow, their earnings tonight, but they're gonna have a uh uh uh presentation tomorrow. We think this company is gonna do $150 million in revenue next year. It's got a market gap of $250 million Canadian. The company only had $25 million in revenue uh last year. So this is extreme growth. Um anyway, they've got a platform, uh, online pharmacy online pharmacy in the U.S. and uh tricky business and uh lots of regulation. Uh it's a platform, and everybody's coming to their platform. It it seems uh it's just growing like crazy. And the and the people that are joining are bigger and doing more uh more orders. They're selling off their uh online platform. So Nurse N-U-R-S. Uh and then this iFabric. We just met up with the management of this company, iFabric, and these guys are bringing technology to the uh to the clothing industry. And so, you know, your scrubs, right? You uh you're a doctor, you're a nurse, you have to go buy your own scrubs. Imagine that, right? Uh so you go to Walmart every uh uh every month and you pay uh you know 75 bucks, 100 bucks, maybe the cheapest ones are $50 to get your scrubs for the for the for the month. Well, these guys have invented a way to put chemicals on your scrubs to kill uh bacteria, viruses, um, and uh so an antibacterial woven into your clothing. And they're selling at the cheapest price. They went through Walmart. Walmart started with 300 stores, Walmart has decided to go to 1,500 stores for these guys, and apparently Walmart told the company that we think you'll get, you know, 10 to 15 percent market share in scrubs in America. Well, that's a $12 billion market. This company we think is gonna do over $100 million in revenue next year. It's got a market cap of $150 million Canadian. Two good opportunities. So hyper-growth stocks listed here in Canada. It's uh yeah, fun times. So we're gonna have to leave it there. Um but we could keep talking, but we we do the feedback that we get is the people like the length of the uh of the show, 15-20 minutes. So we'll we'll continue to do that. And uh we do um get some some very helpful feedback from our listeners and be happy to talk take up any topics that are on your mind. Um just give us a call or get in touch with Paul. Uh also, um as mentioned last time, we have now uh uh spread out the opportunity to be able to gain access to the BT Global podcast through Apple, Spotify, and other platforms that are out there. Thanks to our recording and production engineer Eric Cost and post-production, which has been overseen by our very own Marianne Mount and Karen Valderama. Until next time, be safe out there.