TIP857: S&P Global, Novo, Deckers Brands w/ Stig Brodersen, Tobias Carlisle, & Hari Ramachandra

In today’s episode, Stig Brodersen is joined by Tobias Carlisle and Hari Ramachandra for a new round of stock pitches. Hari makes the case for Novo, until recently the most valuable company in Europe, now priced as if its obesity franchise is a melting ice cube. Stig pitches S&P Global, the company behind the S&P 500 and one of the world’s great ratings businesses, and explains why it became his first new position in more than a year. Tobias breaks down Deckers Brands, the owner of HOKA and UGG, trading at 11 times earnings and buying back stock aggressively. IN THIS EPISODE YOU’LL LEARN: (00:00:00) Intro (00:02:24) Why Hari is bullish on Novo Nordisk (Ticker: NVO), trading at 12 times forward earnings with a 4.5% dividend and an oral obesity pill gaining traction. (00:15:24) The bear case for Novo Nordisk, including Eli Lilly’s lead in efficacy and market share, Medicare price negotiations, and patent expiries in key markets. (00:28:19) Why Stig is bullish on S&P Global (Ticker: SPGI), highlighting the ratings oligopoly, the economics of the S&P 500 index, and why he bought a starter position below $400. (00:46:35) The bear case for S&P Global, including AI disruption of Market Intelligence, competition from startups like AlphaSense and Rogo, and whether 23 times earnings is cheap enough. (00:58:41) Why Tobias is bullish on Deckers (Ticker: DECK), emphasizing $1.6 billion in net cash, buybacks of 80% of free cash flow, and thoughtful capital allocation. (01:19:51) The bear case for Deckers Brands, including slowing HOKA growth, the fashion risk in UGG, a squeezed consumer, and the low base rate for brands re-accelerating growth. Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES If you are interested in a Community for investors to learn, share ideas, network, and join calls with experts: Apply for The Intrinsic Value Mastermind. If you are interested in more personal meet-ups, meeting superinvestors, and discussing investing and things that go beyond: Apply for The Mastermind: Inner Circle. Stig Brodersen’s ⁠Portfolio and Track Record⁠. Check out the ⁠Mastermind Discussion Q3, 2026⁠ | ⁠Video⁠. Check out the ⁠Mastermind Discussion Q2, 2026⁠ | ⁠Video⁠. Check out the ⁠Mastermind Discussion Q1, 2026⁠ | ⁠Video⁠. Check out the ⁠Mastermind Discussion Q4, 2025⁠ | ⁠Video⁠. Check out the ⁠Mastermind Discussion Q3, 2025⁠ | ⁠Video⁠. Check out the ⁠Mastermind Discussion Q2, 2025⁠ | ⁠Video⁠. Tobias Carlisle’s podcast, ⁠The Acquirers Podcast⁠. Tobias’ ETF, ⁠⁠ZIG⁠⁠. Tobias’ ETF, ⁠⁠Deep⁠⁠. Hari’s ⁠⁠Blog⁠⁠. Tweet to ⁠⁠Hari⁠⁠. Related ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠books⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ mentioned in the podcast. Ad-free episodes on our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. 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• 0:00Speaker 00

  You're listening to TIP.

• 0:03Speaker 01

  Welcome back to the investors podcast episode 857. In today's episode, I'm joined by my friends and fellow value investors Tobias Carlisle and Hari Ramachandra. We're doing another round of stock pitches and this time all three are stocks that markets are falling out of love with. We kick things off with Hari's pitch of Novo. And two years ago, it was the most valuable company in Europe. Today, it most certainly is not. And it trades at 12 times forward earnings. And Hari explains why he thinks the bad news is already more than reflected in the price and where he sees hidden value that the market does not appreciate. And I pitched S and P Global. It's a wide mode business with a long runway to grow. And I took a 1% position just two hours before

• 0:46Speaker 01

  we recorded at $399 a share. And this is my first new position in more than a year. And during that pitch, I hope you'll find out why there is more than meets the eye and why the risk of AI disruption is overblown. And finally, Toby walks us through Deckers, the owner of Hoekar and Oc, at 11 times earnings with plenty of net cash on the balance sheet. This is a classic Toby pick, and I mean that as a compliment. I almost want to say that it can't go wrong. But as we all know, those would be famous last words. All right, let's jump to it.

• 1:21Speaker 00

  Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your host, Stig Brodersen.

• 2:06Speaker 01

  Welcome to the investors podcast. I'm your host, Stig Brodersen. And today for our mastermind discussion, as always, I'm here with my friends Hari and Toby. Jens, what's going on?

• 2:17Speaker 02

  Hey, Stig.

• 2:17Speaker 03

  Hey, Harry. How are you?

• 2:19Speaker 02

  Hey, Toby, Stig. Good to see you both. And hello to everyone. Happy to be back.

• 2:24Speaker 01

  Fantastic. Yeah, it's so good seeing you. And let's just jump right into it. Hari, let's hear your pick first.

• 2:31Speaker 02

  Yeah, sure. I think we were just discussing before we started recording. It's been a brutal market and a confusing one, too. There are few winners, few maybe winners who are not at public. But then there are a lot of losers in the game. So I was looking at some of the ones that has lost its shine or the love was much loved before, but not anymore kind of opportunities. So my pick today is one of those companies which two years ago was the most valuable company in Europe. Stig, no points for you for guessing. I'm pretty sure you'll know. And pretty much everybody owned it. I don't know whether you owned

• 3:15Speaker 02

  it, Stig. But pretty much a lot of people, a lot of ETFs, a lot of funds own this company. The analysts really loved it. But today, that stock is down 40% and from its 52 week high, and it's trading roughly around 12 times forward earnings. And basically, everybody's saying, party's over here. The company I'm talking about is Novo Nordisk. It's a Danish company. The ticker symbol is NVO. It's the maker of Ozempic and Wegovy. I hope I'm not butchering the name of the drug. But I think they are well known by Ozempic. Ozempic is

• 3:59Speaker 02

  pretty much a household name now, even if we are, somebody is not taking it, then they would have heard about the name. But the reason I like this pick, or I am pitching it is, is a company that's 100 plus year old, great business. I wouldn't call it as a deep value. I'm pretty sure Toby will disagree if that this is a deep value. But it's a good business at a price that assumes that it's a melting ice cube. So just kind of for background for those of you who don't know what is Novo, as it's known, has been

• 4:40Speaker 02

  up to, they have been in this diabetics therapeutics for over 100 years. One of the things to note is, this is one of those companies, like many of the European companies, it's controlled by a foundation. So that makes the dynamics a bit different. It's almost like, say, Meta or Google, where the founders have the majority of the voting rights. Here the foundation has. So it gives the staying power, it gives the long term thinking, but then also it has the risk that no activists or shareholders can change the direction. So that's kind of the positive and negative. In the past, say, from 2021 to 2025, their

• 5:22Speaker 02

  sales compounded about 19% a year CAGR, and earnings also about the same rate. And their current operating margin are, well, I would say current operating margin has reduced. It used to be like in the 50s. Now it has kind of, you know, reduced to 40%. But it's still healthy compared to many other competitors. And I see it as a company that's mainly focused on obesity and diabetes. They have been making insulin drugs for a very long time. But their obesity drugs are the one that are catching a lot of attention in the past

• 6:02Speaker 02

  few years. So they were the creators of this category, the GLP-1 drugs. But why is it cheap now? Mainly because of three reasons. One is Eli Lilly kind of stole their shine from them. Because Eli Lilly has this drug called tazepatrid, which has shown to work better in weight loss than Novo's drugs, especially the next generation drug, Cagri, Seema that they have launched. And Eli Lilly has taken up 60% of the market share. When

• 6:43Speaker 02

  Novo is still the second best, but Eli Lilly has the lead now. The second thing is, the Medicare negotiated prices are kicking in starting next year. So that might put some margin pressure. And the semaglutide patents, which are all kind of diabetes and weight loss related drugs, they all expired in India, China, Canada, Brazil, and other countries. So you can expect that generics will show up soon. So that's the other margin pressure they might be facing in the near term. And the third is the, the company itself kind

• 7:25Speaker 02

  of guided down the sales. And so it's like down up to 2030, they're working on their pipeline. But right now, that's the risk that by 2030, if they don't have some of the pipeline that they are hoping will bring them good results, they might be in trouble. So that's what the market is pricing in. So market is pricing that this franchise is gone. They might not be able to come up with something good at this point of time. So what we are paying for is that a assumption that they'll not be able to innovate and come up with something new. And I'll talk more about what, what that new is and why

• 8:08Speaker 02

  we should be watching. So in terms of valuation, as I said, 12 times forward earnings. For comparison, Eli Lilly is 24 times. Only Pfizer is in their territory, around 10 to 12 times. Everybody else is priced higher. So my assumption is base case is even in a mediocre scenario, if they can't come up with another blockbuster, the earnings are in the mid single digits. And then we get a dividend of 4.5% to weight. And the payout ratio is quite healthy. It's 50%. However, one caveat there is, they're working on a new

• 8:52Speaker 02

  Pill-based obesity drug, kind of pill-based was a big thing, think of it that way, to compete with Eli Lilly. And that is doing well, actually, it's picking up sales. The latest annualized estimate is that it might become $2 billion in revenue for them. But the ingredients, it has more ingredients that goes into it and they are different. So they are, in the last year, they have spent quite a bit of their CapEx on it to build and expand their factories. So there is a temporary dip in their free cash flow. In fact, their free cash flow is less than their net income last year.

• 9:33Speaker 02

  So even though the payout ratio is 50%, it's not completely supported. It's more than 100% of that free cash flow only for last year. So that also scared the investors. So it's kind of a temporary dip. The CEO also changed. The new CEO joined last year. He is working through some of the restructuring. So those are all some of the negatives again. So but what I get is a mid-single-digit earnings growth, a low P multiple that cannot, hopefully will not compress even further, and 4.5% of dividend, 4.5% dividend to weight. The upside, however, is the overall franchisee, the pill I just talked about, is successful.

• 10:18Speaker 02

  It is showing already success, but it's kind of continues to grow. Even if Eli Lilly is number one and Novo is number two, it's a pretty big market. If you go to the pill-based solution for obesity and diabetes. So it can have worldwide adoption, so they can still make money out of it. But on top of that, they are working on a next-generation pipeline that will compete with Eli Lilly. And I'll be watching out. It's called as Amicretin. It's in phase three trials right now and we'll get to know by 2028 if they launch it. But I'll be watching out for that because that will change the equation.

• 11:01Speaker 02

  If it is successful, that upside is not at all baked in. Right now, what is baked in is they go from a great company to a mediocre company. They will settle in for number two in obesity and diabetes next to Eli Lilly and they'll stay there. That to me is like a 8% to 9% over the next five years. Returns, max 10%, including the dividend. But if they do achieve success with the new drugs, they have few more, but I am just highlighting the one that is really important. The returns can be in the upwards of 18% to 22%, which is very hard to model that.

• 11:43Speaker 02

  So I wouldn't go too much into the number, but it'll be significant than what the base case that I'm assuming for. So this is not a double in next year kind of a pitch. In this market, I'm looking for a bet that is safer, that can give me decent returns while also protecting my downside. So that's kind of my pitch for Novo, Toby and Stick, looking forward to your questions.

• 12:13Speaker 03

  Harry, enjoyed the presentation. When you look at something like Tazepatide, which is the competitor, and I've seen some influencers suggesting that, I don't understand this stuff particularly well, but it targets an additional pathway that Ozempic or Wegovy doesn't target. And as a result, it might be a little bit better. And I see a lot of the guys who are like bodybuilder types mentioning Tazepatide. They have a microdose of Tazepatide to control their hunger.

• 12:51Speaker 03

  Do you think that, is this sort of a technological arms race where the better compound wins out over the lesser compound over time? Or is this something where there's, is there's a big enough market, there's enough of these sort of different use cases that everything can coexist?

• 13:13Speaker 02

  Actually, that's a very good question. And that's one of the reasons why the stock is down, Toby. Is it a winner-take-all kind of a business? Or is it going to be like a duopoly? Right now, Novo is positioning itself as the cost-effective alternative with slightly lower efficacy. So there might be some segments that will pay up for Tazepatide, assuming any other innovation is not coming from Novo. They were the segments created. It's almost like it was their game to lose and they lost it. Because there was an approach, as you just mentioned, that Eli took that Novo ignored.

• 13:56Speaker 02

  My suspicion is, Novo, if I look at them historically, they're really good at insulin and obesity and diabetes. That has been their kind of narrow expertise. They have never been able to do anything outside, but in this, they're really good at churning out product portfolio one after the other. And my suspicion is Novo will catch up in some aspects in terms of efficacy to the point where it might be still slightly less effective than Tazepatide, for example, but it might compete on cost. But you're right, I think that is a risk. The bet here is the market is big enough.

• 14:39Speaker 02

  And one of the other things that they mention is the body type in the sense everybody reacts to medicine differently. Unlike, say, an iPhone and Android, it's like a, just by the product here, it's the product and the body type and the component and the body type. So there might be a subset of or category of patients who might react better to, say, Novo's drug compared to Tazepatide. But it all depends. From what I've seen so far, it's not a winner-take-all. Eli has definitely an edge over them and they have 60% market share today. Novo is close second. But the risk is there might be other competitors too, but I think these two are the major players.

• 15:24Speaker 02

  But yes, that's a risk we should factor in.

• 15:27Speaker 01

  All right. Thank you, Harry. You know, it was interesting that you mentioned that a few years ago, it seemed like everyone owned Novo. For me, being born and raised here in Denmark, I feel like for the past 40 years, everyone has always owned it and always wanted to talk about it. And I don't know, I'm always a bit torn about Novo, right? Like you look at the French, right? And you're the top three market companies they have. You know, it's MS, LVMH and L'Oréal. You know, it just, it sounds a little better. And at its peak, it used to be worth more than all the companies in C25, which is sort of like the Danish equivalent to the S and P 500. And you're like, so what is that? Like diabetes and obesity?

• 16:12Speaker 01

  It doesn't ring as well as UMS, you know, what can I say? But it is the stock that everyone owns here and everyone wants to talk about it. And so whenever people, you know, you're at the dinner party, whatnot, and people always ask like, what do you do? And sometimes, sometimes you fall into the trap of actually telling people what you do, what you're never supposed to do. So I actually, just a quick hint to other people who are doing the same thing, like just say you're in finance, just tell people you're in finance and people bust off right away. They don't want to talk with you. So that's good. That's the short one. Now, so everyone here wants to talk about Novo and of course, no one reads up on it. Like the way that I, and I probably come across as a smug for saying this, but no

• 16:56Speaker 01

  one who owns Novo here in Denmark would ever read their annual report. That is not, you know, the stock analysis of most people. They're like, there's a lot of obese people buy Novo and my parents own Novo and I'm going to Novo and everyone else. And so it is, to me at least, it's a very tricky stock. You pitched Mark some time ago and what I'm very interested in whenever it comes to Big Pharma is very much, what are the systems? Like what are the, because you always have, you know, it's easy to look at the IP and when does that, you know, expire? And then that's the cliff and that's the issue. But so I'm very much looking at the system. So if you can paint some color around that, Harry, like why is the Novo's system better?

• 17:39Speaker 01

  Or perhaps it's not, perhaps it's already priced in. So I'm kind of curious to you, how you think about that?

• 17:45Speaker 02

  Yeah, actually, that is one of the things I was looking into when I was looking at this stock as, okay, it is cheap, but why? There is a reason. And is it a value trap? That was my concern because as you said, Stick, they're pretty much always concentrated between diabetes and obesity. That has been their case. They have not been very good at acquiring into new areas in terms of expanding their TAM, if you will. However, I think there is no shortage of folks in these two segments because if you see many countries, in fact, like India is going through a diabetes pandemic of sorts

• 18:28Speaker 02

  where the diabetics, even there is like childhood diabetes and all that stuff that is on an increasing trend for various reasons. So they have enough market for this. It's sad to say that, but that's the reality. But I think the key here is can they innovate? And the cliff is what you brought up is the most important thing. 2030, 2032 is when the cliffs are coming. And by then, some of the drugs in the pipeline that they have, and the Amicretin is one of the four in the forefront.

• 19:09Speaker 02

  And that's the one that is also, which is quite substantial for them. Are they able to successfully navigate that?

• 19:19Speaker 02

  And regain the efficacy leadership. So it's basically as Toby was also pointing out, it's like an arms race that's going on. It's almost like OpenAI and Anthropic in the AI world. So these two guys are fighting for who has the most effective drug for obesity right now. Because that's where the big money, the rest, I think, rest of the stuff like insulin, diabetes, it's a settled market, they have their leadership, they have pipeline there. It's not going to change, move the needle that much. But here it's like, who has the efficacy? Because this is where the customers and the patients are also very keen on efficacy.

• 20:03Speaker 02

  And these two are like the models from Anthropic and OpenAI. Basically, they are going neck to neck. Sometimes one goes slower, the other one catches up. That's what is happening now with amicretin is like their next version to compete with desapetide, which is the market leader today in terms of efficacy. I don't remember off the top of my head, what's the efficacy and what's the delta? But it's enough for many people, like just Toby was giving that example, to say, hey, desapetide works better for me. And it's also like how Ozempic, if you remember a while back, Ozempic was all the rage.

• 20:45Speaker 02

  It was becoming like a verb for obesity fight. Now it's desapetide. But I think if amicretin is something that can take over, that's what I'll be watching. Actually, the key here is I'm expecting really good returns if they're able to be successful with amicretin, and that's the risk here. Else you have to be satisfied with a mediocre return of eight to nine percent, which I'm hoping might be better than SMP, considering the current market valuation and where we are, I think SMP, correct me if I'm wrong, P ratio is in the mid twenties or higher, like you know, something like that.

• 21:26Speaker 02

  So, and they are trading half of where SMP is trading. So my, my thesis here is most of the bad news is baked in. There is also a leadership change that is baked in into the stock already. So the way market is treating is that it is going to be a mediocre company going forward, which will basically fight on having cheaper drugs, but not the innovation leader. That's the valuation it is getting right now. And if nothing happens, it will stay there for a while. But if they're able to get out with some good drugs, including amicretin and others

• 22:06Speaker 02

  that they have by twenty eight, twenty nine, thirty, then the valuation will also change accordingly. And thanks for sharing that context on working with the regulators, I think. That is an interesting one, too. Today, there is a lot of debate with the AI companies as well about how they want to do regulation capture or regulatory capture. I think pharma companies are masters of that in a way. So yeah, that is another mode that I, I didn't cover, actually. Thank you, Stick, for pointing that out.

• 22:38Speaker 01

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• 25:45Speaker 01

  All right, back to the show. Can I ask you, Hari, whenever you hear, I know I'm completely digressing here, but now you brought it up, whenever you hear OpenAI and Anthropic talk about that they want to be regulated, how much do you think they're actually saying, please create barriers of entry or competitors?

• 26:06Speaker 02

  I think that is one of the strong argument against what they're saying. In fact, you saw many people came out and said, hey, if you think your product is dangerous to the society, stop releasing it. So I think that's, yeah, there is a risk of regulatory capture and especially in this early stage of the game. And I think the risk is not for other big companies like Google or Microsoft or Meta. The risk is for a lot of startups and the open source community. That is what I think a lot of people are against in case of AI.

• 26:44Speaker 02

  And they fear that it will become like pharma, where you have years of FDA approval, a team of lawyers you need to have, and then only the big pharma can win. And it becomes very hard for smaller companies to win in the game and bring innovation and the pace of innovation slows down. I think that's kind of the, they always use pharma as an example. If you see in many of the podcasts or discussions, they always use pharma as an example, saying, do you want us to be like FDA, having an FDA for AI? It will slow down the innovation, it will become like pharma, and we don't want to get there.

• 27:22Speaker 02

  So that's, that's an interesting comparison and to see how the AI industry is looking at pharma.

• 27:32Speaker 01

  All right. Fantastic. Thank you so much, Hari. Toby, will you allow me to take it away with my pick? I took a new position just a few hours here before we hit record. And I know for a lot of people, a lot of listeners, it's not a big deal because they do that all the time. It's been more than a year ago since I last initiated a position. I have all kinds of biases, like everyone else, I guess, but I sometimes tend to get bored. And so it's, it's not good to get bored whenever you, you invest. And so I set up all kinds of guardrails for myself not to invest too often. And one of the, one of the things that I do here, just pulling this up here to the camera

• 28:16Speaker 01

  is that I always force myself to read at least three years of earnings releases before I can put a cent into a stock. And you know, lo and behold, it actually works quite a bit because that means that I don't think that, oh, this sounds exciting, let me invest in that. Anyways, the stock that I'm going to, to pitch that I just took a position in here today is called S and P Global. A lot of people probably are familiar with that, that stock. And it's typically, and you guessed it, they're the guys behind S and P 500 and a lot of other products we're going to talk about here today. And so I sort of like wanted to talk a bit about like how, it sounds ridiculous whenever

• 28:58Speaker 01

  I say how I found this stock, because it's not like it's a hidden gem to be talking about S and P Global. I feel like it's a company a lot of people know. But the way I came into this was really that, like many other value investors, for me, it's always fun to go through the thirteen F filings. And I'm not looking for any hard stock tips whenever I do that. It's a bit more like I have a lot of filtering mechanisms. One of them is, you know, I speak with you guys, you know, it's to me, it's super, super helpful. And being the cheapskate I am, the way I look at 30 day filings, which is the filings that a lot of, I think technically it's asset managers registered in the US with at least $100 million asset under management.

• 29:41Speaker 01

  And so I kind of feel like, you know, being a cheapskate is almost like having free stock analysts. That's sort of like how I'm looking at it. But unfortunately, since I don't pay them anything, they don't tell me, they don't give me any stock reports. All that tells me are their holdings and then I have to fill in the blanks. And so I like to just look up and see if there are any patterns, if there are any kind of, of stocks that's very popular and it's just a, just sort of like a way to see, huh, perhaps there's, there's something there. And I know this probably sounds a little silly because one of the things that I found interesting was, S and P Global, that Chris Hohn bought a bit more and you know, Chris Hohn started this position in 2017. So why is it that this quarter it was appealing?

• 30:25Speaker 01

  I don't know, you know, it's one of those things that you look at someone for a very long time. You see what they're doing and then all of a sudden there's almost like something that clicks. And to me it was interesting because there was a crossover with the new holding with our, with our friend of the podcast, Groomston, who by the way, also have a significant position in Toby's pick. That's a different discussion. And anyways, I have a lot of respect for Chris and Chris. And so whenever there is a crossover, I was just like, okay, taking a look at it. There was a bit of insider buying, trading at an attractive price. Let's see what's going on. So that was sort of like, that was the starting point. And I just want to say once again, that doesn't mean that anyone should go into that trade by any means.

• 31:08Speaker 01

  But you know, it's a, it's a way of sort of like have a lot of, a lot of filters out there and just sort of like to have an idea of where you could start. And then more often than not, you know, you, you stop after 10 seconds and you're like, this is just rubbish. But then with, with S and P Global, it just seemed to be more and more appealing as I kept on digging more into it. So if we look at the company, there are four segments. Probably the one that they're most known for is their ratings business. That is around half of the operating income. And so basically what they do is they rate, for example, corporate bonds. So let's say that you're Alphabet and you're, you're looking to raise capital and you're doing through the bond market.

• 31:51Speaker 01

  But then you need to get a rating to figure it out, like to basically give a public investors the information. They need to make an informed decision and then lo and behold, they're of course charged for that. And so it's a very interesting business model. The business itself is interesting because there are basically three players. And so the number that you, you might see getting thrown around is that S and P has 49%, Moody's 33 and then Fitz 14. That's probably not how I would look at it. And the reason for that is because it's not all ratings that are as attractive as others, you know? For example, your public markets are more attractive than private markets.

• 32:33Speaker 01

  You know, there are different pricing for investment grade and high yield and so on and so forth. So the way I probably look at this is that S and P has 45%, Moody's around 40% and then Fitz is really a distant third. And then there are some others, but you can just for simplicity, not really consider them too much. And really what I found to be very appealing about the ratings business is that whenever you have an oligopoly, which is this essentially is, there are substitutes. So if you don't buy Boeing, you're probably buying Airbus. That's not how the ratings business work. They complement each other. So if you have a Moody's rating, you also need an S and P rating.

• 33:14Speaker 01

  And you even have regulations that are helping you because for a lot of companies, they, it's actually mandated. They need to have the ratings of the big rating agencies. So partly you are protected by that regulation, but it, but what's even better is that it also makes sense for you. Because if, if you don't have, partly you might have problems actually clearing your, your mandate to, to issue the bonds in the first place. But also there's adverse selection here. So if you can't say that S and P or Moody's, for example, have rated you, you have to pay a higher price. And so it actually, you save money as a company by paying Moody's or in this case, S and P.

• 33:58Speaker 01

  And then as S and P, you don't only make money whenever those bonds are issued. They also have the so-called surveillance fees where they continue to update the ratings. So very interesting business model. Then another business segment they have or the indices is only 10% of revenue, but it's 20% of their operating profit. And so that is perhaps the best known is the S and P 500, but they have a ton of other indices. And if you're a Vanguard, you don't pay as much because you have so much scale. So it's sort of like a tiered pricing model and it's probably less than one basis point that they're paying.

• 34:36Speaker 01

  And of course, the information is not public, but you can sort of like try to triangulate from whenever Vanguard like moved money away from MCI. And back in, for example, 2012, there's some data on that and then there's a new or so. You can sort of like try to triangulate, but the biggest providers probably pay less than a basis point, probably around half a basis point. But we're still talking about trillions and trillions of dollars. So it's still, still adds up. And then the two smaller business segments are market intelligence and energy. You can think about market intelligence, I think probably the most prominent service they have is Capital IQ. You can think about that as a competitor to Bloomberg's terminal. Actually, it's just been rumored here not too long ago that they might spin it off.

• 35:20Speaker 01

  And then they also have a, an energy division. So, but those are the two smaller divisions. And again, there's a big difference whenever it comes to margins. So for example, indices is 69%, margins, ratings are 65, whereas market intelligence is only 24%. So just something to, to keep in mind. Going to this segment here about risks and why this opportunity exists. I'm almost inclined to see that I don't see major risks at these two ratings indices. And of course, that's ridiculous to say that because capitalism is, is brutal.

• 35:58Speaker 01

  I think that if I have to highlight a few different things, I would say, especially whenever you're looking at such a high quality business. And the market is typically is very good at recognizing if it is a high quality business, especially if you have recurring revenue. So there is of course a risk in terms of, are you overpaying? That's always a risk and especially if you're looking at something that looks so stable as S and P. Like, is there a cliff out there? Just to use a, a borrow a phrase from the company that, that Harry is looking at like, and it doesn't look so much to be the case. You can probably make the argument that with private credit, there could be some competition coming.

• 36:41Speaker 01

  And it's not because S and P doesn't, doesn't go into private credit. It's just because they don't make as much money whenever they're rating that. It's probably something like 70% less per dollar of debt. And then you don't have the surveillance to tell it. It's very much because you have these private markets and sort of like you have two parties that are very big and they negotiate with each other. But by and large, it's also a numbers game because whenever you're looking at the biggest of the biggest companies, you have to go into public markets, at least that's the way it's looking right now. So it's not because private credit can't erode a small part of the business. I would probably say the bigger risk is not so much what's the interest rate? Is it going up?

• 37:25Speaker 01

  Is it going to be a, a short, let's call it a pause, like if you see a sharp increase in the interest rate? I think the, the way I would probably more looking at this is if debt stops growing, then S and P is in a world of trouble, not just with, with ratings, but also with, with indices. And I'd probably argue then on a world that's on a fiat currency standard, you're not going to see that all of a sudden just stop. I think it's, I think it's a pretty secular trend. That's the short version now. I don't want to go through the whole macro thesis.

• 38:02Speaker 01

  But if you truly believe that we're going to see less debt creation moving forward, don't buy S and P Global. Now we have to talk a bit about AI. We always talk about AI. And I do think whenever you look at the stock price, it looks like it's going sideways for the past five years-ish. And I do think that one of the reasons, I think there are many reasons, but one of the reasons is that there probably be some concerns because S and P is seen as a data company. And I can see why AI could be a threat to the market intelligence division. Keep in mind, the market intelligence is not a big part of that.

• 38:43Speaker 01

  And if you're looking at something like Capital IQ, we're probably looking at something like six to eight percent of their market cap if they got spun off. So it's like, it's, I don't think it's, it's the most severe thing, but you know, the market doesn't always look at a company and weigh every single part. If it sort of like gets the reputation that this is a data company and AI is going to disrupt all data. I do think that's one of the reasons why. I also think that there is probably some valuation that they're trying to, to work off. You know, it, it used to trade at 40 PE back in 2021, now it's closer to 23. And it's because earnings have, have gone up and I do think that it will continue to, to be so.

• 39:28Speaker 01

  Gents, let me, let me throw it over to you guys. I, I still have a section here about the management and also a bit about valuation. But I, I want to, to hear from you guys first here before I continue the thesis.

• 39:38Speaker 03

  I'll go first. I'm a huge fan of SPGR. It's one of the world's great companies, incredibly multi, incredible high returns on invested capital, very well protected. As you say, if you think that the world's going to keep on issuing debt, then stay away. But I think that's a pretty good bet that the world's going to keep on issuing debt. It's a, a name that's been around for more than a hundred years, 100 plus years. Yes, spectacular business, one of the world's great businesses. The stock chart going sideways for five years isn't anything to do with the quality of the business. It's wholly to do with the price. And so, you know, I'm the value guy. So that's really where my interest is.

• 40:20Speaker 03

  Talk to me a little bit about where you see the valuation and what you see the returns like from here, given the price.

• 40:31Speaker 01

  I sometimes feel that it's, whenever you see a stock chart that's moving sideways, or even seeing one that's just going south, you're like, oh my God, this is an amazing opportunity. And then depending on your mood, sometimes you're like, oh, this has gone up for the past five years, it's probably going to continue. So if we can, if we can go a bit away from that and look at the fundamentals, to your point, you're absolutely right, that is also how I read it. Where whenever you go through the numbers, like they're just, they're just printing cash. And it's really looking like they're just, it was just overvalued. And now the market sort of like ceases in a different light. I think that's probably part of it.

• 41:12Speaker 01

  And I also think that there's probably a self fulfilling prophecy for a lot of investors, especially because so many people are chasing momentum. Like it doesn't look very appealing unless you look at the fundamentals. Whenever I'm looking at the shareholder yield, I'd probably be comfortable underwriting a 1% dividend, then a 2% share buyback. And I think a lot of people would find that, especially the share buyback, to be quite conservative. If you're looking at the numbers right now, we're closer to five, but some of that has been debt financed. They're also, they did a, they were spinning off the mobility segment, which gave them some cash that they could use, buy back more shares. So I think that's probably overstating a debt part of the shareholder yield a bit.

• 41:57Speaker 01

  Also, the management has been out talking about their optimal leverage, and they're a bit above the target. And they have a pretty conservative target, I should say. But I think, and this is from memory, but I think it's around, they have their own adjusted EBITDA, of course, like any other company. I think at the time of recording, it's like 2.7, I think they want to be between 2 and 2.5. But adjusted EBITDA is probably just going to go up, increase in any case. But also, of course, you can do that by paying up debt. But so I wouldn't underwrite too much in terms of share buyback. I'd probably say 2% would be quite conservative. I wouldn't be looking at the trailing 12 months here. In terms of revenue, they've been talking about 6% to 8%,

• 42:42Speaker 01

  which I also find to be a bit conservative. But of course, if you, if you add all those numbers up, you were going to say, oh, it's double digit, and perhaps low double digit. I wouldn't be surprised at all, also because you've seen the multiple compression, I wouldn't be surprised at all if you saw a double over the next five years, which would give you 15%. There are a few things I would like to mention here that I actually very much like. They did a spinoff of the mobility segment here, this back in July. And so you can, you can think about that as roughly $20 per share in terms of value. So you have to adjust for that as you're looking for that now. I also like the rumors about spinning off capital IQ. But it's a bit more because it's a bit counterintuitive for a lot of companies.

• 43:27Speaker 01

  Like no one wants to rule a smaller kingdom. So whenever you have those spinoffs, it always makes me excited because finding companies that are truly shareholder friendly can sometimes be, be a bit challenging. And so I like what that signals. So to answer your question, Toby, I'd probably say anywhere between 10% to 15%. You know, it's kind of tricky, like whenever I try to model the intrinsic value, I'm probably around $450 to $500. Like if you put me on a spot and I started a, I had a 1% start position here today. I bought at 399. As you can tell, it was very important for me to buy it below 400,

• 44:12Speaker 01

  which just happened to be two hours before we started recording here today. I could easily be wrong, and of course, I, well, I hope I'm wrong in the right direction whenever I say that, because it also depends on how long do you think the runway is? And it's also tricky, because especially if you look at the ratings business, like it can look pretty choppy, but it's, you know, for example, if you're looking at something like the hyperscalers, it's a small part of their overall business. I think it's something like 3%, but it's 30% of the growth. And so you might be thinking, hey, that doesn't make any sense, like what's going on? Partly because the hyperscalers used to spin off so much cash and they're not doing that anymore.

• 44:56Speaker 01

  But it's also because you have this massive number of companies that are just debt financed, and that's just the way it works. And so that sort of like goes to my point before where, yeah, you know, sometimes it might delay, you know, raising new debt. If there's some chatter about X, Y, C, and then you see whatever's going on at the Fed and like, but at the end of the day, they need that. And so that was a very, very long way of saying 10% to 15%. And I feel pretty good about those returns because I feel like on the lower end of that, there's a very strong downside protection, and I still think that there was some upside there, around 15%. It also comes down to this, what is the certainty of those returns?

• 45:41Speaker 01

  And I feel like, to use your words, it's one of the world's greatest companies. And that's very much what I'm, what I'm looking at.

• 45:49Speaker 02

  Yeah, a very, very interesting pick to take. And as Toby said, this is one of those companies, Moody's and S and P Global. With those of us who have been admirers of Buffett, we have heard Buffett saying, Moody's or S and P is like a great business, always looked in envy because the valuations were always very high. And now here we go, we have an opportunity where the P ratios are looking quite attractive. But then again, when a great business is priced at a low P, a low valuation, there are reasons. And thing that I am looking at and where I wanted to get your perspective on is

• 46:28Speaker 02

  their market intelligence division, that segment generates around close to $5 billion in business, roughly as much as the rating business, if I'm not mistaken. And within that, it's a heterogeneous set of services, like the capital IQ, desktop, terminal-like products is one. There is also data and feeds business where they kind of, you know, main companies that are, their customers are the insurers, private data companies and banks and stuff like that. And then there is, there is enterprise software business they have where they sell loan market

• 47:12Speaker 02

  platform and private portfolio monitoring tools and stuff like that. Then there is credit risk solutions, which is basically an extension of the rating into the workflows of the companies. The last one, I'm not too worried because I believe their rating business is robust. Like it's almost like what Buffett used to say, like, you know, if you tell me that you want to put anything other than Regulus chewing gum in my mouth, will I? Just to try something similarly, like, you know, anybody who wants to get their debt or equity rated, they would go to S and P or Moody's. Otherwise, nobody would trust them or many wouldn't even accept. So that, that business to me is quite safe.

• 47:54Speaker 02

  But I think what market is, like when I was looking at their P, they're at 23 now. They used to be in the 39, 40 range. If you deduct 80% of their market intelligence revenue and translate it into earnings, then kind of, you know, they will be at 39, almost, in my calculation, like 39, 38 P. So the, the way I look at it is, the market today is discounting their market intelligence business heavily, and there are reasons for that. One is their desktop business, as you mentioned, is under kind of, you know, attack from smaller startups which are growing substantially. One of them is AlphaSense, which hit a $600 million in revenue recently.

• 48:38Speaker 02

  There is another one, I forget the name right now, but there is another one, which also is quite interesting to look at, Rogo. Sorry, I just remembered Rogo is the other one. These competitors are actually funded by S and P's customers, like JP Morgan, Goldman Sachs, Wells Fargo, they are all backing these startups. And with 600 million ARR, Rogo is 50 million ARR. These guys are growing and they're trying to take away market share on the market intelligence side, especially the desktop terminal and the feed, the analysis, the credit risking, portfolio monitoring.

• 49:20Speaker 02

  These areas also, the other thing that is happening is as AI is becoming more prevalent, things are moving from terminal to insights. So earlier, you used to employ a lot more analysts who are all watching the terminals, using the terminal to get insights. Now with AI coming in, I mean, at least the thesis is that you will no longer need that many analysts, so the number of seats might reduce. And two, AI will do the job for you rather than having terminal. And that, that is where I, the way I look at it is you're getting, I'm probably not getting a steal, and market is discounting what would happen in the next few years.

• 50:04Speaker 02

  So I'm still buying this great company and a great franchise and credit rating at the usual P that I would have bought it. So, so my expected returns would be still same had I bought it at 38, 39, considering the headwind. So that's kind of what I'm worried about, and I wanted to get your perspective on the market intelligence segment.

• 50:26Speaker 01

  Yeah, I am pretty skeptical about market intelligence. So I think you bring up a great point. Let me pull up the numbers here. So you're absolutely right. Market intelligence ratings are approximately same share of revenue, but the margins are very different. So market intelligence are only 17.9% of operating profits. And one third roughly of market intelligence is, for example, capital IQ. They don't break that out, I should say, in the public filings, but you can do a lot of triangulations with AI these days. And I also think, you know, case in point, AI, we have to talk about, especially when it comes to market intelligence

• 51:11Speaker 01

  and how that's going to disrupt financial services. To me, it's a little bit tricky to wrap my head around. And let me explain why. I, and perhaps I'm naive, I'm not too worried, at least right now, whenever it comes to Claude coming in and disrupting them. And of course, they're also, you know, connected with all interfaces, but it's not so much Claude, even though a lot of their customers were already being Claude. They need the data and they're not shy of saying that 95% of the data is proprietary. It's 88% specifically in market intelligence. Now, just because data or proprietary doesn't necessarily mean that it's great data. Now, you can think about this.

• 51:56Speaker 01

  Actually, it was quite interesting because we started talking about 13F filings. And so they were specifically asked into this in one of the earnings calls. And so what they said was that the way they could also think about proprietary data was 13F filings or not, but you can still find the 13F filings on their terminal. But they're sort of like putting their own layer on top of, what does that mean then? And then the question is, well, how important is it then? What their insights is of their 13F. And of course, you can then ask a questions and give you different data on that. But I definitely think to your point that their competitors are partly, it's ripe for disruption. And I would also say, I don't have any reason to believe

• 52:40Speaker 01

  that something like capital IQ is better than fact sheets or Bloomberg's data. I have no reason to believe that's the case. I definitely think that it's very commoditized. Now, I do think, and I kind of feel like I'm copying out whenever I'm saying this. I don't think it's a cliff by any means. It's subscription, more or less all the revenue is subscription. They need fast and reliable data. So that's also why I'm saying Claude is not a competitor right out of the gates. They need that data to be reliable, needs to be very good. They're already trained on that. And for everyone who's been running a company knows that if you trained your team on a certain type of platform, it's very difficult to stop. And also, very often, the decision makers,

• 53:25Speaker 01

  who might also be using themselves, are not the one paying for it. So there are some, they're talking about mid-single digits in terms of growth. I think you can probably underwrite something that's flat. I see a lot of pricing pressure on that segment, but I don't think it's material for the business as such, whether it's plus 5% or zero in market intelligence. That's not where that's coming from. I do think it's very interesting to follow. Now, of course, the mobility segment got a lot of attention, also got quite a bit of attention that the capital IQ might be spun off. But whenever you follow them, it's very interesting how often they would go in and buy different, call them services

• 54:10Speaker 01

  or bundle of data or even companies, if you like, and then how often those things are being spun out. It's really interesting to see how they do that. So, well, the first thing is that I would definitely pay attention to that as you were trying to model the different margins. Because if you're spinning off something like market intelligence, your margins are just bound to improve just by definition. But I definitely think it's very valid that you bring that up, Hari. As you can tell, I don't have a good response to that other than whenever you crunch the numbers, it doesn't change the overall thesis. But I do agree that there's a reason why the market is, has this negative sentiment of them being disrupted in market intelligence. So here, before I end my pits, I just wanted to talk a bit about management and their compensation.

• 54:56Speaker 01

  I usually have like a segment in all my pitches where I just complain about management compensation. This is not going to be too different. It's not too bad, though. I think if you look at it across the S and P 500, it's probably moderately better than average, but I also think it's a very, very low bar. And it's quite standard. What I mean whenever I say standard? So you have 8% of share target would be base salary. So it's quite common. And then they have, you know, the remaining is what they call at risk. And I really, really dislike that they're called at risk because typically, and this is no different, you have a portion of that that is restricted share units,

• 55:38Speaker 01

  which basically means that as long as you have a pulse and don't get fired, you get free stock. Which is, whenever you think about it, not different than getting a base salary in the first place. So you're kind of like, is that truly at risk? In any case, without going through like all the numbers, there is 18% is annual incentive with your standard adjusted numbers, where they're trying to grow revenue, trying to grow EBITDA. And then, of course, they adjust because you can't have GAAP numbers and management compensation. And then they have what they call long-term incentive with this 74% share target, which is divided into some performance measures, of course, by adjusted non-GAAP numbers,

• 56:22Speaker 01

  and then restricted share units. I also want to say that the insider buying that I alluded to in the beginning of my pits are really not that significant whenever you start looking into it. You know, they got a new CEO here. I think it was November 1st, 2024. As it is very common for CEOs, whenever they start a new position, they would typically do a bit of insider buying. But like, it's like she bought a million dollars worth. And whenever you're making $12 million a year, like it looked a bit more like good faith. What I actually find to be slightly more interesting was that it's quite common for large cap or mega cap CEOs to have this, it's called a 10B 5-1 plan. It just rolls off your tongue.

• 57:07Speaker 01

  And so it basically means that you automatically sell with ease vesting. And the CEO has not done that. And it's almost like two years ago now since she became the CEO. So if you can see that as a bullish sign that she's at least not selling out of the shares she's getting. So anyways, I feel like I've been rambling for too long here about how excited I am about S and P Global. But I just wanted to throw to you guys for any concluding remarks or questions.

• 57:37Speaker 02

  Yeah, it's a good one, Stig, from my perspective. And Toby would also agree. It's always like, I'm looking like, what is the catch here? Why are they offering us cheaper than it used to be? And that's where I think need to dig in a bit more. But definitely, it's one of the safer bets.

• 57:55Speaker 01

  Let's take a quick break and hear from today's sponsors.

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• 59:58Speaker 04

  This September, I was in New York for the Intrinsic Value Conference. The talks were great, but what I kept thinking about is what happened around them. On Friday night, about 20 of us crowded around a long table at a family-style Italian spot near Times Square. Saturday, we did it again. And Sunday morning, a group of us were still debating Socrates over breakfast before everyone headed home. Many of the people at those tables had only known each other from our calls in the Mastermind Community. That is the community I host with Kyle Greve and Daniel Manca. Each week, we get together on live calls to dig into markets and individual businesses. We bring in fund managers, operators, and authors as guest speakers.

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  And a few times a year, like New York this fall and Omaha every spring, we meet in person. If you want to think in decades alongside people who do the same, apply for free at theinvestorspodcast.com/mastermind. If your application stands out, I'll be the one to reach out to you personally. All right, back to the show.

• 1:01:00Speaker 01

  Well, I like that you say that, Hari, because now we're in this crazy market environment where value investors are talking about P of 23s. It's like a bargain price, so I don't know if that's good or bad. But luckily, I know that Toby's pick is not trading at a P of 23. It's, do I dare say, Toby, it's a traditional Toby pick, and that's meant as a compliment, I should say.

• 1:01:26Speaker 03

  Yeah, I take it as a compliment. Thanks, Stig. My pick is Deckers Outdoor. Deckers owns the Hoka running shoe brand and UG boots. It's a 10-point, so the stock price, when I prepared the $77 handle, market capitalization, $10.6 billion. P is 11. They've got $1.6 billion in net cash on the balance sheet, no debt. Enterprise value is $9.7 billion. Revenue through to March 2026 was $5.5 billion, which was up 10%.

• 1:02:06Speaker 03

  Hoka grew 15.9%, but has slowed to the most recent quarter to 7.7%. UG grew 8.2% to $2.74 billion. So it's about half Hoka, half UG. It's not an SPGI, it's not as emotive a business as that. It's not a Nova, nor is it a much more fragile business than either of those two. But there's a huge discount to those two as well. This is the sort of business that I like to buy in the funds that I manage. We look for things that are potential takeout candidates that are trading very cheaply on a financial basis, so that the beginning of our analysis is the valuation.

• 1:02:47Speaker 03

  And then we're looking for sufficiently good businesses that have some growth built in, not necessarily, although if they're cheap enough, we don't need the growth. But in this case, there is some growth. At $77, this is being priced as if it has no growth. There are quite a few qualities of Deckers that I quite like. It's a very, very clean business, clean management, clean balance sheet, very well-defined products in their categories. People absolutely love the Hoka running shoe, absolutely love Uggs. They're very loyal customers to those things. One-share class, independent chair. Cindy Davis, she used to be with Nike, so she knows the business.

• 1:03:31Speaker 03

  All the directors are independent, no related party transactions. The $1.6 billion in cash is about $11.75 per share, which is about 15% of the market value. It was trading north of $200 before the tariffs hit in April last year and absolutely collapsed when the tariffs hit. So that tells you part of the story. Part of it is also, there's this, folks who follow the market will know that the market's become very concentrated in a handful of the AI beneficiaries, the hyperscalers. And everything else, basically outside of those businesses, is in a little bit of a bear market. They're all down quite a bit. You can look at a stock like Nike, it's way down, it's 80% off its peak.

• 1:04:15Speaker 03

  There are many examples of these previously were considered very high-quality businesses that have sold off hugely. The Uggs are the, you know, that's the shearing shoe that's sort of turned inside out. So you have the wool on the inside. UG is the trademark, they have the trademark, but there are, obviously, there are potential competitors out there. The CEO, Stefano Caratti, he's $1 million in salary, $3 million in bonus, $6 million in stock, so 60% of its equity grants. He's performance-based, investing over three years. So I like his, I like his compensation. There's no return on capital measure, which is what I would, you know, that's the Buffett, the old Buffett metric here.

• 1:04:59Speaker 03

  You like to judge these guys on return on, return on capital. I don't think it matters so much because this is a naturally high return on capital business, but it's just something worth flagging. I think it's one of the very, I think it's a fairly mild sort of criticism because he's a very experienced guy, he's been in the industry for 30 years, he's been with Nike and Puma. He's run Hoka since its, since its sort of breakout. Capital allocation, I absolutely love. This is my favorite kind of setup. There's no dividend. Dividends have the double taxation in the States, so I, you know, ideally Berkshire doesn't run a dividend, they buy back stock. These guys don't run a dividend, they have no debt, they buy back stock. Buybacks are 80% of free cash flow.

• 1:05:41Speaker 03

  So this is a, they're really focused on the capital structure here. Share count fell 7% year-over-year. The share buybacks were done at $102 and $104, and the stock is currently trading at $77. So they're underwater on those buybacks. But the, the buyback authorization is $4.7 billion, which is more than 40% of that market capitalization. If they continue to grow at the modest rate that they are and buy back stock at that level, the remaining shares will do very well. The amount of cash that they have is very, very conservative, $1.6 to $1.9 billion.

• 1:06:22Speaker 03

  And they're cash flow positive, so I think it's a good thing that they continue to buy back stock. I don't want them to go into debt doing the buyback. I think that they'll just keep on buying back out of cash flow and using the cash on the balance sheet. I hope that they continue to do that. So the two other alternatives that you could look at, if you were considering some exposure to something like this, you could, ON, they're the sort of most direct competitor to Hoka, growing a little bit faster, founder's still there, trading at 14x forward earnings, so it's a little bit more expensive, but it's also had a 40% slump from its 52-week high. And then there's Nike, which I mentioned earlier, which similarly, that's the behemoth in the, in the industry.

• 1:07:04Speaker 03

  Perhaps had some marketing missteps, perhaps it's just too big. It might just be one of those cyclical things too, where I think the market is, I think it's a broader market thing rather than necessarily a Nike-specific issue. I still prefer Deck to both net cash and higher margins. I like seven times EV operating profit. It's around that sort of seven to eight times EV, but that's pretty cheap for a business of this quality. ON's growing a little bit faster, but I think that you're also paying for it because of the 14x forward earnings. Nike is, the chart is a thing to behold to see how far it has fallen. I check in every now and again just to see if it's bounced on.

• 1:07:48Speaker 03

  It's not interesting to me at these levels, but wow, that's been some, for what was, I remember a discussion between Buffett and Lou Simpson, who was his, he ran his insurance desk for a while, and then he went and set up his own business before it passed away a few years ago. And he had a debate with Buffett about why he liked Nike so much. And so it's a real, it's been amazing to watch Nike kind of get knocked around the way that it has been. And I don't know if that's tariff-related or if it's marketing issues. They sort of had this more woke-ish campaign that sort of seemed to hurt them, and they've transitioned now back to more traditional sort of marketing. As to fair value here, there's a few assumptions built in.

• 1:08:29Speaker 03

  If you assume no growth, fair value is probably roughly where it is, maybe a little bit of a discount, $72 versus $77. I don't think that's a reasonable assumption because it is still growing pretty well. It's growing faster than inflation, significantly faster than inflation. Plus, the buyback will mean that there's value accruing to the remaining shareholders at a pretty high clip for an extended period of time. I think that part of the sell-off has to be the slight reduction in growth. It was sort of 16% last year, it's now 8% sort of to the most recent quarter. Management says that there's some, they're trying to adjust to the tariffs, there's some timing issues.

• 1:09:12Speaker 03

  I also think that a lot of consumer-facing businesses are seeing this. I think there's a real squeeze on consumers. Interest rates are up, that hurts consumers. Energy prices are up, that hurts consumers. You know, diesel's very, very expensive, that filters through to all of the other prices, so that, that's inflation and prices. We've also seen student loan repayments have been turned back on in the States, so that squeezes discretionary spending that would otherwise be spent on something like this at the margin. So I think that there are a lot of macro factors that aren't directly in their control that are impacting, and the tariffs that I mentioned earlier. I think that those things, they're all a little bit cyclical. When the consumer gets squeezed, these sort of opportunities pop up.

• 1:09:56Speaker 03

  It's a good chance to buy these sort of stocks when they're in this little bit of a slump like this. I would assume that Hoka and ON compete. For folks, I should have mentioned this at the start, Hoka, if you're not a runner, you might not know about the Hoka shoes, but they have the very, their big selling point is they have the very fat shoes, and they've got this little shape to them, this little rock that's supposed to help you run a little bit more easily, go a little bit faster. There's sort of a direct contrarian in the running community. There was the barefoot craze for a little while where people wanted no cushioning at all. I'm still honestly in the barefoot part of the market, but there's also this other side that they've gone the other way, where you have the...

• 1:10:41Speaker 03

  The additional padding and Hockers, they're the additional padding guys. So there's this like philosophical debate among runners, which is the better shoe. I don't know the answer, but if you're a, if you prefer the fatter shoes and you prefer the Hockers and people who like these shoes become very, very loyal to the brand. They love those shoes. Similar with Uggs, not really a performance shoe, more of like a, in Australia, when I was a kid, you would never wear these things out of a house. They were sort of considered to be an inside shoe. And then they got exported to the States and people started wearing them outside as sort of like a fashion thing. You'd see these attractive young girls wearing Uggs boots. And so they sort of blew up a little bit and became very fashionable.

• 1:11:23Speaker 03

  I think that that fashion has sort of passed a little bit and now they're, they're more comfort shoes. But you certainly see them around in winter when it gets a little bit cooler. So in summary, I like Deckers because it's very, very clean across all of the sort of things that I care about. Capital allocation, management, the shoes have loyal followers and it's very clearly defined what they are in the market. People, people who like them, love them and they're taking advantage of this sort of temporary undervaluation, but buying back enormous amounts of stock. I think it's a reasonably safe bet, although as I said earlier, it's not, it's not the sort of moaty business that, that SPGI or Novo Nordisk is.

• 1:12:07Speaker 03

  It's a, it's a much more fragile business because it rests on these two brands. But having said that, you are compensated because you're getting a much deeper discount.

• 1:12:15Speaker 02

  Yeah, I think this is a very interesting pick, Toby. It is like a Toby-like pick for sure. Because then I, when I was trying to like, you know, look into it, it sounded so attractive. It's like hard to come up with excuses not to buy. Like it's a very asset light business. They don't own their production facilities. I was just thinking about Nova's case where they're blowing in CapEx to build those facilities so that they can increase production in case of, correct me if I'm wrong, Toby. These guys just outsource it to partners or vendors in Vietnam and other places. So very cost effective manufacturing, but nothing stays on their balance sheets and that shows in their ROIC.

• 1:12:57Speaker 02

  So amazing business and like, you know, I, I see Hoka shoes everywhere. Whenever I'm going for like a jog or anything, so it's, it's quite popular. So the only thing that I wanted to ask you, but you answered at the end is like, how should is the management and are they buying more now? Buying back stocks more now than before? Looks like you said yes, so that's a good sign as well. And the CEO is also pretty good. And like unlike Nike, you're talking about, which is very interesting. They, they made a couple of missteps in terms of how they were marketing their product, where they were positioning, they withdrew from their, say the suppliers and the retailers and wanted to go direct sales.

• 1:13:41Speaker 02

  So they, they did a lot of missteps in terms of brand positioning. Looks like none of it under the current CEO who has been there for a long time now and has really shepherded the company and also grown the brands like Hoka from the beginning, as you said. The only concern I would have is the slowdown in growth in case of Hoka from say 16% per year to, sorry, 24% to 16%. And you already mentioned Uggs is kind of a maturing brand in the low mid single digits that it is growing. I guess what are the potential of your base case coming true is what I'm thinking, which means it's currently at the fair value range already.

• 1:14:27Speaker 02

  And if that is true, Toby, would it still be a good investment? That's my question. Like, so of course like saying Hoka and Uggs will go away or fade away. Yeah, that is a very edge bear case. I don't see that happening though, from what I see the trends. But if they continue to slow and mature in their growth, absent a buyout by a private equity, what would be the returns in the, in the kind of slightly bearish base case that you just mentioned?

• 1:14:59Speaker 03

  Thanks, Harry. I think through these in scenario analysis, so I'll just take you through my scenarios. The bear case is that Hoka stalls and Uggs, for whatever reason, is more of a fashion. And so it goes through this sort of fashion downturn, which, you know, that's possible. In that, I'm assuming growth of 2% across both brands, which is like less than inflation. So that's basically just like they're getting squeezed on, on costs there. They're, they're real, it's not real growth, it's real shrinkage in, you know, inflation adjusted returns. And I've said the terminal multiple is eight times there. So that gets me to $72 per share versus $77.

• 1:15:44Speaker 03

  That's the bear case. My base case, this is just taking management's numbers and just trimming them a little bit. In that instance, I say 3% growth and an 11 times multiple. And that gets me to about $113 as fair value. And then there's a bull case where we say that the slowdown in Hoka growth is some sort of macro factor where people are not spending on these shoes because they're just getting squeezed elsewhere. They're not updating their shoes as often because they're paying back student loans or more is going to groceries or more is going to the gas tank, which I think all of these things are actually happening. And then if these pressures were taken away, which I don't think they're happening anytime soon,

• 1:16:28Speaker 03

  but there's this possibility that those pressures do go away over time. And then you get back to more like 4% growth and that probably warrants a 14 times multiple. That gets you to like $160. I think that that's a fairly low probability, but I think, I think it's a kind of comparable probability to the bear case. So I think that there are both say 20% probabilities. And then the base case, which is the management's case is a 60% probability. And so the mid range there is something like $110 to $115 versus $72. I don't know which one's more likely, but that, that's sort of the way that I, the way that I think through it.

• 1:17:08Speaker 03

  And so I think about the skew in something like that where my downside, $72, my upside might be $161 or I don't think either of those scenarios is particularly likely. And probably management's mid case with management buying back stock. One of the things I really like is when management does take advantage of these undervaluation and they have the cash flow there to do that, that really limits your downside. Because the more they buy back, the more concentrated the value becomes for the shares that remain. And so there are lots of many good examples of companies that become no growth, but management's very good at sort of using the free cash flow to buy back stock. Like AutoNation has done that and O'Reilly's and lots of these.

• 1:17:50Speaker 03

  They sort of just leverage buyout themselves on the market over time. This is assuming no private equity firm shows up to take them out and you still end up with pretty good returns. In that instance, it sort of caps your downside a little bit. There's a bid there under the stock and if they start running again, then, then all is good. So that's the way I think about it.

• 1:18:10Speaker 01

  So Toby, classic Toby pick and I, I love it. You know, I tried to look at the fundamentals before I look at the share price. And of course I failed miserably this time around. So I looked up the stock first and saw it was trading at a 52 week low. And I could not square that whenever I looked at the fundamentals. It just, it looked off. I thought I was looking at a, at a declining business. And it was not, I wouldn't say it was firing all cylinders, but, but it, it looked very, very healthy. I was greatly surprised. So I was sort of like trying to figure out like, why is it that the market doesn't like this stock?

• 1:18:52Speaker 01

  Now I can come up with a few reasons and you also mentioned a few of them yourself. I think the, the base rate of what they're trying to do of re-accelerating. And of course you can say that some of that is already priced in, but you know, if you look at other brands, Crocs, Under Armour, Skechers, Vans, Lululemon, and I don't know if I offend anyone. If I, if I group them all together, it's probably not fair. But it's very tricky to re-accelerate growth whenever you, you first see a decline. That's, that's just the nature of, of the business. It's not specific to, to any brands. It's just, that's, that's just part of it. So I, I think that there's probably a base rate skepticism included there.

• 1:19:35Speaker 01

  There's probably also something to be said about, it's a tricky, it's a tricky price point, like $200 for a pair of shoes. Now, I think there was probably a narrative around LVMH, you know, a few years ago where, oh, people with money always have money. And of course that you also see LVMH being, being flat. But it sort of like goes to, to what you were also getting at before where it's a tricky price point. Like there's a lot of pressures from, you know, whether it's tariffs or price of diesel and just general inflation. Like it's tricky for a lot of brands that are in that range where it is pretty discretionary. And perhaps some of the things that, that you might not buy or perhaps you're going to wait another six months

• 1:20:19Speaker 01

  or, or whatnot with that purchase. And I found it to be quite interesting that you mentioned that they have loyal buyers. You know, I, I don't think I'm the, I'm the best person in terms of, of the tag group. I probably have used Nike for, I don't know. Ten, fifteen years. And then last time, my wife said, I found these other brand, I think it's Asics or something like that. I mean, like, I don't have a very sophisticated system, like whatever my wife That's whatever I would use. So anyways, if I can sort of like say, I'm sure more people are way more fashionable than what I am. I think that there's probably something to say about the Apple test, right? Like, I don't know if you're gents or iPhone guys, but if I

• 1:21:04Speaker 01

  If I ask you guys, like, hey, if you have an iPhone, how much could I pay you not to, never to use an iPhone again and use an Android instead? You know, I don't know. We don't have to play that game because now I'm giving all kinds of biases. It's probably more than a thousand dollars. It's more, I don't know if it's more than 10,000. Like, there's probably An amount where you're like, okay, for a million bucks, whatever. There's probably an amount where you're like, yeah, I'm never going to use an iPhone anymore. But the price is Probably high, not just for you guys, but for a lot of listeners, like you're used to an iPhone, you really like it. There's probably something about the brand. It's not just functionality, but probably something about the brand.

• 1:21:41Speaker 01

  Something about the ecosystem, how if you have a MacBook, it works together. And so it's quite unreasonable for me to say this, because That number is obviously a lot lower with something like Oc or Hoka. Like, it would be different. Like, if I offer someone $20,000, you know, They would probably choose another pair of shoes. Whereas I do think that some people probably, I know $20,000 is a lot of money, but Some people would probably say, no, it's not enough for me to never to use an iPhone again. So there is something about how loyal people are and how price sensitive they are. I think there's probably an element of what people say, but also what people do. And you could probably say the same thing about Apple. So there's that component.

• 1:22:24Speaker 01

  Then there is another where I absolutely love their capital allocation. I think that's, that's probably one thing I want to highlight. I would also be quite curious about, does this signal that the stock is undervalued, which I would imagine that it does, or That they cannot buy, I'm going to say, a third brand. And it's not completely fair whenever I say a A third brand, because they do have a third brand. It's just very, very small. I think Tiv has like 4% now, but, but like Whenever they acquire Hoka, for example, in 2013, it was almost free and now it's doing 2.6 billion in In sales. But so it's like, should that be the strategy? And of course, it doesn't, it's not completely fair, because they also have to use a lot of money in marketing to

• 1:23:04Speaker 01

  Make it popular. But I don't know. And then there's probably a component where I would really like for Management to buy in the open market. But you know, you can say that about all, all management and very few are actually doing that. You know, it's kind of interesting that you mentioned Nike there before. I think our mutual friend, Chris, and I should actually, I know I'm digressing completely, but The reason why we brought on Chris so many times, actually, because Toby made an introduction back in the day. I just want, so that's why I'm always going, going back to Chris. But next time I speak with him, I should probably ask, Why did he sell Nike to buy Decker? I kind of feel that that's quite interesting. I sort of like, I'm the same team as you, like Toby, like I

• 1:23:43Speaker 01

  Look up Nike from time to time, because I just, I grew up with Nike. And this stock is just, it's down 75% over the past five years. It's down 42% just this year. It's just, it's absolutely amazing what's going on right now. And I, I think it's probably because I'm so unfashionable. But I have a really hard time figuring out, like, now this is cool and this is not cool anymore. And this is, so I think that's probably goes back to one of my, one of my concerns. Now, With all of that being said, and I know this is sort of like famous last words, but at the valuation you're looking at right now, and it's such a clean balance sheet. I was just about to say, I can't see it go wrong. And of course, the definition of a company that's down 90% is A company that's down 8% of then is halved, you know, but

• 1:24:30Speaker 01

  I don't know. I think there was my two cents. I don't think there was any kind of question there for you.

• 1:24:35Speaker 03

  I think that the risks are, there is this sort of fashion component. I think more, less, it's less fashion than People who are sport enthusiasts become gearheads a little bit, and people who are running competitively, they like a particular type of Thing. And that's what I was saying before, there's that philosophical debate about whether you want the much more cushioning or no cushioning at all. People who've decided that they want the stability and the cushioning, the shoes are surprisingly lightweight. I've read for the amount of cushioning that they have. And so that's what the aficionados are going for, that I agree that that's a very niche kind of part of the market. It's nowhere.

• 1:25:15Speaker 03

  I don't imagine that this is something that really grows to become a giant kind of business. I think that it's a It's a very niche little running shoe market for enthusiasts who are into that particular They like the geometry of the shoe. They've got this particular rock when you run. It's, it's broad based and cushioned. And that's the The feeling that people like. And once they find the shit they like, they like to stick with it. Having said that, there are real competitors out there on Is a real competitor. And so that's going to cap how much they can charge for these shoes. And then just more broadly, there's that, I do think that the consumer is getting squeezed on many different fronts.

• 1:25:56Speaker 03

  Having said that, I think that that's one of the reasons why they're suffering at the moment. That's why many of these consumer facing, consumer discretionary brands Are suffering. And if you have the patience and the wherewithal to buy, when you see those sort of things happening, Then it's all very cyclical consumer discretionary. The consumer goes from being squeezed to having better times. So I think We saw a lot of the, there's a huge amount of discretionary money around when everybody got their stimulus checks in 2021. And now we're in the other side where everybody's getting squeezed. The free, you know, the better times will come again, and these stocks will probably trade

• 1:26:36Speaker 03

  At a higher multiple than they currently trade. In the interim, there's a little bit of growth and a pretty good buyback. And so I think it sort of muddles through and it does okay. But the risks are the trade policy. The administration is really looking to re-industrialize America. I don't know if that policy changes with the change of government, but probably not. I think that's probably a longer term Focus now that the manufacturer will be moved away from China and towards the US. And so that trade policy, I don't foresee that really changing. I think they're going to, I think that there's going to be a lot of volatility as they figure out what they do, but I don't think that the Intention changes over time. And it's a one or two brand

• 1:27:18Speaker 03

  Business. And there's competition in, in running shoes from some very big Competitors and Nike's out there. And I would say that Nike, with its stock down that much, is hurt. And they're probably looking to come back with Retool and figure out some new things. And so they'll be a real competitor as they try and figure out what to do here. So All the things that, I can't find anything in the balance sheet or in management's compensation or in the way that management did. I think it's very clean from that perspective. And so I think it's a good opportunity. But it's not a multi-business the way the other two are. And so some discount is, is necessary, but it's financial, purely on its financials. I think it's too cheap where it is.

• 1:27:59Speaker 01

  Gents, it's been amazing as always. Thank you. It's always privileged having the opportunity to talk stocks with you guys. Before that you go, Toby, take it away. Where can people learn more about you?

• 1:28:13Speaker 03

  We manage two funds, domestic US equities in mid-cap and small cap. Mid-cap is Zig, small cap is D. It's been a very bifurcated market where large growth has done very well and small cap value has done very poorly. That's not the way that it always is. These things cycle. And I think that if you, if you look at The capital allocation philosophies, they'll say some allocation to gold, some allocation to globally dominant franchises, some allocation to small cap value. And so that's what I'm trying to be, the small cap Value part of the allocation. If you take that approach, you'll always have something that's working and something that's not.

• 1:28:49Speaker 03

  The fact that it's sort of uncorrelated to the rest of the, the book is the feature and not the bug. It's going to perform idiosyncratically and differently from everything else. And so You can see that the performance, when the rest of the market gets soft, sometimes small cap value does very well. And I've been around, I've been doing this for long enough that I've seen the good times in small cap value. And the bad times in small cap value. And so I anticipate better times in the future coming.

• 1:29:14Speaker 01

  Wonderful. Thank you, Toby. Hari, you are smack down the middle of Silicon Valley. How do you feel about Small cap value? And where can people learn more about you?

• 1:29:24Speaker 02

  Yeah. So, yeah, I feel nowadays, like, you know, every week is different. So my feelings are going up and down. That's how Silicon Valley is to nowadays. But a lot of great conversations happening in and around the valley. Of course, with you guys in the value investing communities. So I try to engage with everyone. Twitter or X is a great place. I'm, I hang out. And my handle is Hari Rama. And I look forward to conversations. I blog on pitsbusiness.com. So Look forward to conversations on Twitter.

• 1:30:00Speaker 01

  Fantastic. Thank you so much for your time.

• 1:30:03Speaker 03

  Thanks, Steve. Thanks, Harry. See you guys next time.

• 1:30:06Speaker 02

  Yeah. Thank you both. Good seeing you.

• 1:30:09Speaker 00

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• 1:30:52Speaker 00

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