Keith Richards :
Today we have another guest interview and this guest is a name that you might be familiar with if you read the blogs regularly. It’s Craig Aucoin and Craig has been the CFA, Chartered Financial Analyst and he’s Vice President and a Portfolio Manager at ValueTrend. You might be familiar with him because he’s done a few videos with me, and of course he’s answered many of the questions on the Ask Us Anything blog. So it’s really great to have Craig here today because he’s going to be covering that side of the world that I don’t cover through my blogs and through videos. I’m always trying to give you guys a new perspective on stuff so this should be a really, really fun interview. And you get to hear mainly from the Craig side of the equation today, rather than having to listen to boring old me.
Craig Aucoin :
Thanks, Keith. Hi everybody.
Keith Richards :
So we’re going to start off just like I do with all my guests, I always ask for some input on what they think they should be talking about. Craig wanted to spend a bit of time talking about global indices in global markets and global stocks, because this is an area that people don’t often look at. So, Craig why don’t you highlight some of the stuff that we were discussing and start this off with the global look.
Craig Aucoin :
People often wonder how we position our portfolios and when we’re looking for international exposure it’s not that we decide or we set up our portfolios in a way that, oh, we need to have 10% weighting in Japan and then 5% weighting in Australia and 30% in China, et cetera. We don’t have an international exposure parameter that are specifically in set. We are driven by the technicals largely for one, we look for country exposure. But the fundamental side or the makeup of the country and the indices themselves is what I wanted to talk about today. The what you’re getting when you invest in a particular industry that you expect to be of a country. We want to look at what the makeup is and is it really what you might think you’re getting?
So that’s where I wanted it to start and kind of open the door or open the hood and take a look at the composition there. So to start, maybe we could look at what I’m speaking of. When we’re looking technically at a chart, for instance, if you’re looking at a chart of France and you’re expecting that, okay, this ETF will use the iShares MSCI as an example. That indices is made up of, as you would expect, some French exposure. Well, that exposure is a number of companies and those companies do business all over the world. But when you think you’re getting country exposure, you would think you’re getting the exposure to the economic reality of that country.
Well, when you get exposure to the French ETF, you’re actually not getting only exposure to France, you’re getting exposure to other places where these French companies do business. So the indices themselves as the iShares is made up of French companies that are registered in France. So they trade in France, but it doesn’t look necessarily at where the revenue composition comes from. So one example I wanted to look at specifically is the biggest weighting in the French ETF. Here is a small financial statement from Louis Vuitton, and I’ll use this as an example of the geographic weighting of the company and where they generate their business. You’ll see that this portion is taken from the Louis Vuitton financial statements and their annual report.
It shows in the green highlighted area there, that in fact, France is only 8% of the revenue that they generate. So it could be argued that this isn’t really exposure to the French economy at all, or the economics of France at all. But when you look at the indices itself, the weighting in Louis Vuitton is 13% of the index. So you would expect that you’re getting exposure to France through this ETF. You’re really not. You’re getting exposure to French companies that are domiciled there, but do business potentially globally. In the example of Louis Vuitton, it’s quite evident that their 13% weighting in the indices is not representative of the exposure that you get by owning that company to the economics of France. You’re only getting 8% in that company.
Keith Richards :
We can see that Asia and the United States, between the two of them, are darn close to 60% of their net sales I guess delivery in that company, let alone other markets in Japan and whatnot. So case in point, it’s very little.
Craig Aucoin :
That’s right. So you can’t argue with the technicals, of course, when we’re looking for exposure to an indices. But when you’re looking for the true indices, that’s what you’re getting the exposure to the indices. But from the fundamental side, when you think you’re getting exposure to a diversified portfolio and getting exposure to France, you’re not necessarily getting to the economic realities of France, yet you’re getting exposure to companies that are domiciled in France. So it’s not quite necessarily as it might appear.
Keith Richards :
For example, we’re talking about the France ETF iShares. Would this be similar to most of the top companies in that ETF that the amount of actual revenue they derive from France itself is going to be not as great as one might expect by buying a ETF?
Craig Aucoin :
Yes, that’s exactly it and Louis Vuitton is the biggest. It’s the biggest weighting in the indices so obviously it’s the best example I’ve found. It is true of others and it’s also true of other indices. So if you’re looking at a Japanese ETF, it’s similar to varying degrees. But often European ETFs tend to have more diversification as far as geographic revenue diversification. Their exposure is more diversified across the world than maybe others. China might be a better example more of the weighting in those indices is driven from revenue that generated in China. I think though the weightings are greater there, but you don’t get complete exposure to that geography. You are getting exposure to others. But the concentration is greater in China.
Keith Richards :
So you’re really just looking at what could be great companies in that particular geographic region that’s represented by the ETF may have fantastic companies that you do want to own and you want to access them through the ETF but you’re not necessarily buying something that’s representative of the economy of that region. You’re buying new companies in that region.
Craig Aucoin :
Exactly. That’s really the overall understanding I wanted to present and walk away with was that it’s great companies, not denying that, but it’s the makeup that you think you were getting diversification on a geographic basis and it’s not quite as it appears.
Keith Richards :
Excellent. Okay. And actually I’ll just bring up for the readers of the blog, I blogged a while back, not much back, probably two, three weeks ago, about different types of recession proof type companies. One of my findings was that the very ultra upper end of discretionary purchases, because normally in a recession, people buy less of the fun stuff and just concentrate on being able to feed their families. But at the upper end of the consumer, meaning not just upper middle class, but the upper, upper end, the people that buy Ferrari and Louis Vuitton type of products, they tend to keep buying. So they’re not cutting these stocks like Louis Vuitton, for example. They’re worldwide and there’s rich people all over the world, so they sell their handbags and expensive booze or whatever it was. They sell all over the world.
So another interesting thing. I’m glad you started off like that because we’ll talk about other aspects of what you looked at, but that is one of the things I know that you’re looking at. I have a list of questions that you and I kind of discussed that we would, we should maybe have you talk about, and they are in no particular order, but if I were to focus on one thing that you always talk about is a catalyst. So when we talk about a stock that’s going to break out, so technically I’m looking at something breaking out, or a market’s going to breakout, the most important thing is just because it’s breaking out, is there a catalyst to make that break out real or continue? So can you just give us some update on what you mean by catalyst and what kind of things could be a catalyst?
Craig Aucoin :
Sure. Couple examples of things that would be catalysts come from the management side often. Whether there’s a management change that’s coming, whether that’s due to succession or whether it’s due to someone getting fired and not doing their job properly and investors wanting someone else to be at the helm, that would be maybe a positive catalyst. On the other way, lack of succession and the forced retirement of someone would be a negative catalyst. If a company is moving into another area and it was largely forecast and they’ve been working towards purchasing another business to make it a subsidiary or something. That would be a catalyst maybe on the positive side.
If they conveyed the message properly that they were going to be doing that and working towards it, then it could be set up as a positive. However, if management didn’t give clear guidance that they were looking at expanding their business and all of a sudden went out and made this acquisition, it would be negative. Some of them you don’t necessarily see coming and you can’t prepare necessarily for those. But sometimes with others, that is getting closer to the realization of that catalyst and maybe you see it in the charts first. Maybe there’s an inkling of it there, but those are the type of catalysts that we would look for. And sometimes you can forecast and sometimes you can see them coming and other times you can’t.
Keith Richards :
Okay. So this is a question I had. I work with you every day, but sometimes I’m always scratching my head on how you’re trying to estimate a company’s possible or potential success. Sometimes I will come to you with a stock that’s broken out. Again, I’m using breakouts because it’s my favorite formation. Often I come to you with trending stocks touching a trend line, but let’s say a breakout. It has been bit of a head and shoulders or cup or whatever, and it’s broken the neckline. Now I’m going to you and you’re telling me if they’ve got a good business model and if there is a catalyst for that breakout to continue. But the next thing is the timing because as a technical guy, I’m just saying, Hey, it broke out. Then you are saying, well, there is a catalyst, and you’re trying to figure out, well, when that catalyst may trigger the stock to continue going higher or do go higher. So can you give some insight on what might cause a longer term leg on that breakout? Meaning a more meaningful move or a lower, just small move.
Craig Aucoin :
The larger move, it really comes from things that have changed. There has got to be a number of things. It’s not always one thing. I think that might be the biggest difference in whether it’s a larger breakout. It’s more than one catalyst. Maybe it’s a culmination of a number of things coming together. If a company has worked through a plan that is a reorganization, and they’ve had some had some success in that and it’s built up over time that investors are becoming really more comfortable with the probability of them having success at this new direction that they’re taking.
They’re getting more comfortable because there’s been developments. There’s been some new senior managers come in. There’s been some smaller maybe tuck-in acquisitions that fit nicely with this new direction. And that type of buildup, the culmination of these things together could be seen as something that’s responsible for a larger move. Maybe a smaller catalyst and a smaller breakout might be the result of having a better earnings season or having a better buying season. Maybe here might be a good time to look at chart that we talked about for Nutrien.
Keith Richards :
Okay.
Craig Aucoin :
I could illustrate one of these smaller moves that we might see soon as a result.
Keith Richards :
Yeah, because actually that chart will allow us to see some time ago when we originally bought the stock and the breakout and then recent action when we sold it. And you can talk about your reasonings beyond the technical stuff that I always talk about. The reasonings fundamentally for liking the stock when it broke out, and not liking the stock when it broke down and starting to maybe like it again now. So give the reasonings.
Craig Aucoin :
So, in the larger breakout, I think we would see in 2021. That was the move. We had owned it into that purple line but that was a bigger breakout. Is that not true?
Keith Richards :
We bought on the original kind of bottom formation, but there was that resistance at the purple line. We were very cognizant of that o we had stepped in pretty gingerly. But yes, once the big purple line, and you could see it did pause out there, once that was busted, we got very committed to the stock. I think we started off at 2% and moved our way up to eight or something like that.
Craig Aucoin :
At that point, we had more confidence in it there. Now I would move to 2022, and this would be a smaller break. There was a break and that was really saying the catalyst for that move was the unrest and the conflict in in Ukraine and Russia. That is the timing on that and we can see it was pretty quick when we look back. It broke it in early 2022, and then by the middle of 2022, it had stopped. As we move to today, and I think it’s another one of these levels where there’s a catalyst to go higher from this maybe around here. Their catalyst being that the inventories are so low and that farmers really need, in North America, to replenish.
And that replenishing, that buying will, I believe solidify and give a firmer price and firmer volumes to Nutrien to be more profitable going forward. I think that that, potentially, the new buying season, the new filling of inventory by farmers, the food for their crops will potentially be something that’ll support the stock here and push it to move higher. That’s from my fundamental belief. It’s not a huge change in strategy or it’s not a new monster move higher or change in the company’s direction, but it’s something that is positive to give it maybe a move to the top of the range and to that level. Does that make sense as far as how the difference between a big multi-catalyst move to maybe a smaller more concentrated catalyst?
Keith Richards :
Yes. So just to kind of put it in a summary format, when we bought it, it was quite undervalued and we stepped in. Craig noted that the kind of ballistic move out of that small cluster in early 2022 then Ukraine and all that happened and the stock went bananas. I think we were actually holding about a 6% portfolio position, but it turned into an eight because the stock didn’t perform so well during that period. and so we started legging out just like we legged in on the way up. We started legging out because between Craig’s view on the catalysts and my view on the technicals, between the two of us, we were just saying, okay, we’re going to leg out.
We sold some on the ballistic move, probably not very high, I can’t remember, but it would’ve been around here and another chunk there and another chunk there. When it broke down, by the way, we eliminated our entire position and so now we’re looking again. Why? Because that old resistance point is going to become a new support point and sure enough, it is. So this is what Craig, you were saying is that there is a catalyst that could bring it back up to at least the old support level, which was here around maybe a $100. Is there a catalyst to bring it back up here again? That’s to be seen, but you’re saying that, look, they’ve got to restock, they’ve held back. So you see how the two are moving together. We saw a support level and that doesn’t mean anything unless there’s a reason for it to bounce off of that, but Craig’s got a reason.
Craig Aucoin :
Great summary. Yeah, that’s it exactly.
Keith Richards :
I wanted to now just kind of go a little deeper down the rabbit hole. I’ll start off because I’ve got two questions for you left and I’ll tell you them both up front and you can answer them in either order you want, Craig. One is describe the common perception, real or imagined, between value and growth investing and where your ways of doing things fits into that and maybe leading from that or into that are the type of metrics you use. Because everybody that watches the videos or reads my blog knows, hey, Keith uses trendlines, he uses this, he uses that. They don’t know what you do. So let’s talk about your views on value versus growth and therefore what tools you like to look at as the nitty gritty stuff.
Craig Aucoin :
I would say the nitty gritty is hard because I’ll have to relate it a little bit to the technicals to say that looking at a company technical, you don’t care if it’s an auto producer or if they grow bananas, the technicals are the same. But from a fundamental side, if you’re looking at a car company versus a food producer, it’s quite different in the kind of metrics you want to look at because certainly the car company is going to be more cyclical. There is just going to be more levers that can change the dynamic of that company in different times in the economy, different times in a business cycle.
However, a food producer, it’s a more consistent business. So you want to see more consistency and you would understand that it should be more consistent because the levers are not the same. So then at that time, you could look for a higher multiple and a higher multiple on what? Well, a higher multiple on cash flow, a higher multiple on earnings. Both of them, you’re looking for and you can expect to pay a higher multiple on something like that because there’s greater consistency. But with a more cyclical company, you can’t rely on that. Now to go into the value and the growth, in my mind, it’s similar. You’re going to look at different metrics and a value company or a value way of looking at things is where you’ve seen something that’s more established.
You can recognize that, okay, this company’s has been in business a while, or they’ve got so much capital intensity that okay, yes, the business cycle impacts them, you can recognize value and say they’ve done it before and it’s, cheap now because they’ve gone through some hard times. But we want to say they’re going to get back to peak earnings or they’re going to get back to making money. Then you can buy that at a cheaper valuation and look for it to go back to a strong valuation. A growth company, you’re really looking for something that hasn’t reached maturity, has growth where it’s greater than the average, it’s greater than the economy, it’s growing more than the economy. So it’s certainly growing more than inflation.
(28:54):
You’re looking and trying to value on the cashflow and the earnings growth going forward. So in five years from now, it’s going to be a company that has a greater value because it’s grown over the last five years at a certain rate. So, discounted back to today, you’re saying, okay I can invest in this company now with the expectation that it’s going to grow in five years to this. Okay, great, it’s going to grow 30% this year, 25% next year, 35% the year after, whatever that dynamic is, but it’s growing at double digits. Well, compared to a value company that maybe is growing 2%, 3%, 2% again, that is really where your difference is. Now, you’re going to pay a higher multiple for that growth in the expectation that you’re going to get it.
(30:03):
The risk though is that you’ve now paid for something that doesn’t transpire. There’s greater risk, I feel, in the growth. Because why? Because they haven’t done it before. It’s not only that you can value it on, okay, they’re going to deliver this. Well, they might not. I think the risk in a growth company is greater than the risk in a value company, because I feel value they’ve done it before, they’ve been in business longer or they’ve got a business that is less risky because you’re expecting less growth from them. A growth company by its nature, I believe, has more risk, but you’re getting compensated more with the expectation that they’re going to grow more.
Keith Richards (30:55):
Okay. So I’m actually going to add a comment and then a final question. These are on two different stocks, so brace yourself, Craig. Craig didn’t even know I was going to ask these. These aren’t curve balls, don’t worry. So the comment, just based on what you just said that one pays up for the prospects of growth with a growth company. Is that a good summary of what you were more or less saying? You are paid up with them with that potential, right? Yeah. So one could argue that people are paying up a pretty good premium, which may or may not be justified. We’ll see in the future and that’s the risk you’re talking about with these AI companies. I mean, there’s great potential, there really is, but have we just paid a premium for those stocks that represents everything? We don’t know the answer to that, but that’s, that’s the risk you were talking about, correct?
Craig Aucoin :
That’s exactly it. AI is a wonderful example of a growth mindset. As an investor, you have to have that growth mindset if you’re investing in AI companies. The value just hasn’t been proven yet so we don’t know. I believe it’d be very difficult to make an argument that these are valued companies.
Keith Richards :
Yeah, yeah. I thought it would be an okay example for you. So now I get to throw this at you. We talked about Nutrien a minute ago and to me there’s an expression called GARP, right? Growth at fair price or whatever, so it’s trying to combine the two. Would you say that Nutrien represents their leg? It sounds to me like you’re saying, oh, they need to restock fertilizers so there’s a bit of growth potential from current levels, but it’s also undervalued maybe? How are you going to address that?
Craig Aucoin :
I would look at Nutrien more as a value enterprise. It’s a business that has existed for a long time. It is established and yes, they change the mix. They changed the additives they add, they market it a little differently. But at the end of the day, it’s food for crops and at the end of the day, it can grow, but I don’t think it is going to grow at a significant pace that you would refer to it as a growth company.
Keith Richards :
Yeah. So we’re just trying to take a spot where we feel that the price versus what the company can earn in the future is maybe a little off side from what we might expect in the next years.
Craig Aucoin :
There’s still potential there. There’s still lots of potential, but you’re not paying for it to grow 10% this year and then 20% next year and then 30% a year after. That’s not the expectation. The expectation really is they’re underpriced for what they can deliver and the potential they can deliver in an environment that they get back on track. It’s an established business that has just fallen offside and it is under underpriced, I believe, at this point.
Keith Richards :
Okay and I should, for disclosure purposes, we don’t own Nutrien because as I mentioned, we sold the last of it probably a couple of months ago. It’s the 14th of June as we record this and we don’t have a position, but you viewers will probably be seeing this video about a week after we recorded it and we may have actually done a leg in. We’re kind of recording this at a time when you’re hearing us make the decision to probably at least do one leg back into Nutrien and we always work with legs and if you take the technical analysis course I’ve done online, you’ll learn all about legging in.
So Craig, I wanted to thank you for doing this because I wanted to get people to hear your side of what we do together and I think we covered it.
Craig Aucoin :
Good, great. Thank Keith. We’ll do it again.
Keith Richards :
Yeah, absolutely. If there’s a topic that you would like Craig to cover, we could do a second interview and if there’s maybe a little bit deeper down the rabbit hole of fundamental analysis because we wanted to do a high-level view today. But if there’s other stuff that you’re interested in, and we could do a follow up interview in a couple of months and answer some of the deeper issues that you might want to know about.
