IFB117: Sharing Our Top Stock Analysis Tools as We Analyze a Railroad Stock

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Dave:                                    00:35                     All right folks, Welcome to Investing for Beginners podcast. This is episode 117 we’re going to continue down the train. You’ll get the pun here in just a minute, a train tracks of answering some listener questions. We get another great one the other day and Andrew, and I wanted to go ahead and take a stab at answering this, so I’m going to go ahead and read the question. Andrew and I will do a little back and forth, so it says, Hello Andrew. I pray that your week is going well. I recently subscribed to your real-money portfolio and learning a lot. I’ve been listening to your podcast for some time now and appreciate you and Dave’s insights. A few months ag,o I ran a screen and found GBX that had some great appeal. I haven’t purchased your VTI but have something that I’ve been using to assess intrinsic value using Morningstar and guru focus information. Question with the market cap being around 750 million and the sales being 2.8 1 billion, how does that fit into your preferred metrics for screening? I liked the other numbers a lot, and I’m just wondering could this be a value trap just because it is a smaller company. Thank you for your time. Again. Thank you for sharing what you weren’t in an understandable way, Kevin. All right, Andrew takes a stab at and talk about what we were talking about before we came on the air.

Andrew:                              01:51                     Okay. Yeah. So my idea for this, obviously I’m going to answer the question eventually, and you’re going to have to remind me. But I think, so w we were looking at this. This is a stock I have; I haven’t looked at before. I don’t believe you looked at it before either. So we were in the pre-show going in and going through our approach on, you know, checking out stock like this. And I was thinking, well this is pretty useful. Why don’t we do the same thing but share it with the audience? So I have a lot of things that pop into my mind when I look at a stock like this. I’ll probably go on tangents to my tangents in this episode. So bear with me. I think when you look at any stock, you’re going to have a lot of different thoughts that pop in your head and it’s useful to try maybe to distinguish between how are these thoughts going to help me decide on whether I want to buy this stock or not.

Andrew:                              02:54                     I’m not going to pick, you know, and say that somebody should buy this or not. I think maybe that’s something the listeners I’ve gotten to use too. Now. The other thing. I want to make some other disclaimers I guess before even starting and then maybe we can dive in for some of the thoughts that pop into our head and take a stab at some of that. I would say, Oh, I hope this episode doesn’t get discouraging because it’s when you look at stocks, you can get into the weeds. You can jump down the rabbit hole, and you can do all the things we try to talk about. This is a show for beginners, so a lot of the things that we try to emphasize does not overanalyze, you know, do not try them, find everything out about +stock and do not be sitting on your hands and not buying stocks in general.

Andrew:                              03:53                     I think for me being somebody who’s been doing this for over five years, it’s easy for me to get stuck in a more advanced approach if that makes sense. And maybe this episode might turn into that because those are a lot of the thoughts that go into my head now because I’ve been doing this for a long time. So when I look at the stock I, I’m able to make these mental shortcuts and get down to what is my ultimate decision going to be. But I realize that’s not the right approach for everybody. I think if you’re a beginner and you haven’t bought your first stock in general, I think this; this episode might be a little bit too much for you to handle because a, it’s going to be pretty in-depth on the analysis. And so I’ll; also, I think I’ve, I’ve mentioned this before, I think a lot of the stock analysis that and a lot of the decision making that you can make on the stock is like the 80, 20 approaches. Where you’re going to do fine and the majority of your results are going to come from probably 20% of, of the work of you looking at a stock.

Andrew:                              05:06                     I think a lot of the return will come from certain stocks that might mimic the market. And I think you need to make an evaluation for yourself of what the time commitment is that you want to make for evaluating stocks. I love looking at stocks. I love digging into the numbers, and I think a lot of the things that are going on in my life give me that benefit where it benefits me to spend a lot of time on this. But for a lot of, I’m average investors; if you find it’s like pulling teeth, I would probably not do it. And if you think that the extra time you spend to get to try to generate Alpha is what they call it in the industry, but trying to beat the market by a couple of percentage points, I think it can be very, very rewarding, especially if you’re young. But it might not be worth it for everybody, in which case an index fund might be better, or I mean even blindly following my, you know, the real-money portfolio picks, that might be a great thing too because you have those decisions being automated for you. But as always goes with stocks, you know, buying hold is, is the huge thing. Being diversified is a huge thing.

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Andrew:                              06:28                     Okay. Now that I’ve done the tangent on my tangent, I’ve done all my disclaimers. Now we can dig in, right? I think the first thing that pops in mind for me, and I  want to see where it, what your thoughts are, this or on this to Dave. So obviously I use what I call the value trap indicator, and that gives me a great by ourselves signal on, on the stock, I want to purchase. For me, I look at the stock like this Gbx, and it’s a stock that I’ve never heard of. I’ve never heard of the business. So a lot of the thoughts that go in my head are going to be different than if I buy a stock that’s very well known. So as an example of, and I’m just going to talk about stocks that have been stock picks in the leather, but they’re expensive now, so they’re not strong buys anymore.

Andrew:                              07:22                     So I’m not like giving away these picks. But these are picks I’ve made that have gone up in price quite a bit. So when I think of a stock like Cisco or a stock like Disney or even a stock like Hormel, which Hormel’s not well known to some, depending on what area of the country you are, but they have a lot of brand names that are very well known. I look at a stock like that, and once I see a VTI that tells me I’m going to buy, I almost always pull that trigger. I mean like I’ve, I’ve looked at those stocks in the past, and so I’ve known that the other kinds of intangibles are okay for me. But when I think of a stock like Cisco where you and Disney think of the mentality, is this going to be around in 10 or 20 years?

Andrew:                              08:06                     Just because it’s so familiar to me, I  know how that, how their business model works and I can make that thought process where I’m like, is this going to be around in 10 to 20 years? Yeah, probably. So the other things of really digging in don’t apply as it would for a Gbx because I’m so confident in them because they’re such big names, if that makes sense, that all I need is a VTI. Whereas if it’s something that’s not as


, not obvious isn’t the right word, but not as well known or one that maybe I wouldn’t feel as confident about 10 2030 years from now, I might put a lot more thought into it. Does that make sense at all? Yes. Okay. That does. Do you make, do you take like a similar approach? You maybe have different thoughts on stocks depending on how popular they are or how maybe entrenched in the culture they are?

Andrew:                              09:07                     Yes. Okay. So I try, I mean, to me that’s, that’s it’s a qualitative aspect of looking at a company as opposed to just the number of it. Yeah. Okay. How much weight are you putting verses like, are you giving, are you letting the stock have a higher valuation because it’s because he liked the qualitative the better maybe? Yeah, probably. Okay. So that’s my first thought is with GBX, I, I don’t know what they do. And so it’s like the first hurdle to jump over is what exactly do they do? So we mentioned on the podcast before you can pull up a tank k and you can go to the business section, and that gives you; hopefully, management has been good at giving you an overview of what they do. So when I did that, they talk about how they do rail cars and North American rail cars, European rail car and marine vessel fabrication.

Andrew:                              10:15                     So, so they make rail cars, and I’m assuming they probably sell them to the railroads or, or whoever, you know, they have their vendors. The other couple tools I think that can be useful and maybe would be some tips is like; I like to get a sense of not only what the company does, but who do they compete against. So two tools that you can use for this seeking alpha. If you put in the ticker symbol and they have a tab on there that are called peers. And so if you click on that like how not only do they group is based on the sector but also on the industry. So as an example, they included some of the bigger railroads because it’s [inaudible] it’s a related industry. So if they’re selling railroad cars, some of the railroads that pop up, KSU, Kansas City, southern Norfolk, Norfolk Southern Corporation, Buffet owns outright a couple of railroads and, and he, he’s pretty bullish on, I think the railroad industry in general, I would assume.

Andrew:                              11:22                     So if he owns these companies and or stocks. So what pops up is our podcast favorite trinity industries. They also do the industry of railcars Seeking Alpha calls that construction machinery and heavy trucks. And then it looks like there’s this other company or symbol, our AI l called Fright Car America, and it looks like they’re in the same industry. One other thing, well two of the things you can use I like to also just the ticker symbol and then competitors. And usually, somewhere around the top, you’ll see the Nasdaq nasdaq.com page. And so if you click on that, and then you sort by market cap, you can also get a nice list of names generally. So like as an example, I get a lot of the same names that seeking out if I had like KSU, so their group, they, they more group it in.

Andrew:                              12:21                     So I guess what’s frustrating about doing analysis like this is there’s no, like, they, like companies, don’t have to say when they file a report, Hey, we’re in this industry in this particular, I think sectors is more, is more widely accepted by industry specifically. There’s no black and white definition for one. So it can be frustrating looking at these different resources. But I think Nasdaq is good because it can give you a general idea. And then the seeking Alpha thing, I haven’t used it as much lately, but I think I will use it more and more cause I like how they break it down into a specific industry. And you can also use fenders, and they also have like an industry tab on there too. But those are the things I look at. And then from there, it’s like you have a, a context point on if I’m going to look at this company, maybe I’m going to look at their competitors too and see how they stack up.

Dave:                                    13:20                     Yeah, that’s a great tool. I the tool that I use for the comparison give you an idea of the peers is a guru focus has, if you click on any of the numbers that you’re looking at, revenue, earnings, Roe, doesn’t matter if you scroll down on that page, they have a competitive comparison. And what they do is they choose companies that are in the same industry with headquarters lake in the same country. And our closest in market cap. So you get a row, you get off more of a apples to apples as far as the market cap goes for companies like that. So if you’re taking some small microchip company and you’re trying to compare them to like you know, Qualcomm or somebody, some giant, then it’s not exactly apples to apples. So, I like it because it shows you, it gives you an idea of comparison and then it shows you what you’re originally looking at. So for example, if you’re looking at a revenue of Greenbriar companies, which is the company that we’re focusing on, it shows you a market cap of 10 other companies and their revenues. So you can get a comparison, of just that particular metric. Whether it’s, you know like we’re looking at revenue. It could be priced to book; it could be, you know, debt to equity. It doesn’t matter. It will all show you the same thing, which is I think is Kinda cool.

Andrew:                              14:49                     That is cool. What would the next thing that pops in your head that you would maybe look at when it comes to stock like this that you don’t know?

Dave:                                    14:59                     The first thing I did when we first started talking about this as I pulled up my seeking Alpha app on my phone and just started  looking at the, I guess the first thing we looked at was the price to see what at the, you know, see what the price is. And the first thing you see on seeking Alpha when you look at the app is it shows you the current price, and it also gives you a one-year comparison on the price. I’m not a huge fan of charts just in general, but it’s interesting to note that you can see that there’s been a steady decline in the price of the company since September of 2018 so almost a year there’s been a steady decline in the price. And that would weed me, you know, these are all things that make you start asking questions like, why, why is this, what’s going on with a company?

Dave:                                    15:50                     Does the market know something I don’t initially and what, what can I look for? So whether those are good signs or bad signs, if it’s the reverse, and it’ll say the stock has gone up, you know, quite a bit since September of 18. then you could also do the reverse of that and spend some time trying to figure out why is the, why is the stock doing so well, our revenues growing or earnings growth. You know, has there been a change in management as they, if they improved on the efficiency of their operations, have they taken on some huge new customer that’s driving a lot of this? There’s a lot of questions that you want to ask, and that’s, I think the biggest thing when we’re talking about screening for companies and trying to determine whether this is a company we’d want to invest in is to start making questions.

Dave:                                    16:38                     Make a list of questions. As you’re going through these initial reviews of a company and trying to determine what’s going on, why is it, what, why is what’s happening? And they could be very simple things where they could be more complicated. You don’t know. But that’s like the first thing that I looked at. And then the next thing I look at as, they have a little section here where you can look at a board data and company description. So as Andrew said, you know, you can go to the 10 K, or you can also scroll down to the bottom of this, and it tells you just a brief overlay of exactly what it is that they do. And so you can get an idea of that. And then I guess the next thing I looked at was enterprise value and the market cap. And I noticed that it’s a smaller market cap, so it’s $744 million for the market cap, and the enterprise value is 1.1 billion. So those are, those are good signs. But I guess the question I asked myself as, Ooh, that’s on the smaller side for me, then that makes me a little nervous about investing in the company when it’s a little bit lower like that. But those are, those are just some general things that I look at initially. What about you?

Andrew:                              17:51                     Yeah, I, I pull it up on Finviz as the very, very first thing I do, which I failed to mention. And so I’m, I’m looking at what the valuations are based on what I see on Finviz because I’ve been doing this a while. I can tell roughly where the VTI will lie. The next step would probably be the run the VTI, and the double confirm that, but I thought it’d be fun to talk about the stock when regardless of it’s a strong buyer or not. I guess secondly I would, to me longterm health is very important, so I want to make sure the balance sheet looks good. This is where another tool comes in that helps you shortcut some of the processes. You don’t have to dig into the 10 k right away. There’s a tool I use called quickfs.net, and they have different tabs.

Andrew:                              18:45                     You can look at an overview of the stock, and then you can look at the income statement, the balance sheet. So I like to click on the balance sheet cause you know, fin this has their debt to equity formula, but that’s not as conservative as I like. So when I go to the quick fs.co.net, then there’s a nice, it brings it all on one screen, and it’s, it’s nice, and most of the time it’s accurate. You always want to double-check. But so I’ll, I’ll look, and I’ll like, I’ll look at total liabilities as, as one example. Compare that to the equity that gives me a true sense of the debt to equity. And generally, I want that below one, ideally below 0.5 is even better. Once you get to two and above, that’s where you start to get nervous when it comes to that. Just based on what I’ve seen and I’ve talked about that before with was it the three strikes, and you’re out I think. I think that had a lot of it, something like that. The other thing I’ll look at in the balance sheet is like how much cash they have and how that compares to the debt and also if there’s a lot of goodwill and intangible assets.

Andrew:                              19:55                     So I think if a company like this has a lot of goodwill that would make me nervous cause based on what I read about the business overview, they don’t have brand names. Going back to the 10 k, one of the things I saw when I read in, there was if you look at the competitor’s section, they talk about sometimes depending on management; they’ll talk about what their competitive advantage will be when they talk about competitors. So for this stock, I think they said they compete on quality. Um, I can pull it up again. I can’t remember. They said oh here we go. We, we compete based on price, quality, reliability of delivery, launching capacity, and experience with certain product types.

Andrew:                              20:40                     So not a brand name thing. So you shouldn’t see a lot of goodwill. And I don’t like to see a lot of goodwill in general, but maybe if it’s a company like Hormel where they have a ton of brands, and you feel good about the brand names, and you’re okay with a lot of goodwill there, I hope that’s not too advanced. But yeah, that, that would be some of the initial thoughts, plus looking at what they do and getting a sense of where they, where they fall in the market.

Dave:                                    21:09                     Yeah, that’s, that’s great stuff. I love the debt to equity looking at that and I, I’ve, I’ve never actually used that website, so I might, I’m going to start checking out. Then, the next thing that I look at is the, I go to guru focus after I look at just briefly at the stuff on seeking alpha, just because it doesn’t, I don’t feel like it gives me enough access to enough information to, to start, you know, looking at more things to ask more questions. So when we look at the deck to equity, for example, for Greenbrier, it’s a 0.4 which is awesome. Anything below one Andrew said is what we’re looking for. And, and that’s, that’s amazing. So that’s, that’s fantastic to look at. The next thing that I look at would be the return on equity and the return on assets.

Dave:                                    21:58                     And the return on equity is a little bit lower than I would like to see. But one thing that I would ask my question about is I’m not as familiar with this company, and it’s been a while since I’ve paid much attention to the rail car industry that may be normal for them. The industry looks like the average is about 12 and a half or so. So it looks like this might be a little bit on the lower side for that. Then the other thing you’d look at would be the return on assets as well. And these are both metrics that show you the profitability of the company and generally the higher, the better. And so those are things that you’d want to look for. And these are just initial overviews of looking at things. And again, it’s all about asking the question.

Andrew:                              22:44                     Yeah, of course. So I think most websites when they report an ROI or an ROI return on equity, return on assets, they’re going to use the last year’s data. So if they have one year of bad earnings, that’s going to affect Yeah. So I guess the question becomes there is like, is this something that I think will be like, does it seem like they’re going to sustain this level or is there a good chance that they’re going to improve it? And that makes it like a pretty good value.

Dave:                                    23:14                     Exactly. And along those lines than with seeking a, or I’m sorry, with Google Refocus, I can look back at there that we used initially. You can look back at the last four years of, for example, return on equity. And to Andrew’s point, the trailing 12 months are, is quite a bit lower than the historical average for the last four years. Now it has, it’s showing a, a decline in the last four years. Now that again, these are all things that are going to add. You know, we did ask questions and to do some research to dig into why some of these are happening. Andrew made a, made a great point in not focusing on the one year number when you’re analyzing the company. And that’s one of the things I guess I wanted to illustrate. And the same thing applies with a return on assets.

Dave:                                    24:09                     Those have been quite a bit lower over the last. So the last trailing 12 months is quite a bit lower than the historical average. So that again would bear something to look into. And it looks like in the third quarter the ended in February of 19. They had, it looks like they had a rough quarter for whatever reason. So those are kinds of things that you would want to check into and discover. Why is this happening? Was it that just a one-off? Is there something happened during that quarter that caused it to be a downturn? Is that cyclical for them? Is that normal? These are, I guess all the question that I want to ask and answer for myself. We’ve talked about this before, but in essence, what you’re doing is you’re creating an extended checklist of things that you want to check into.

Dave:                                    24:56                     So when you first screened for the company, like Andrew and I’ve talked about Andrew truck’s about in his great book, which I still use every single week, these are all things that will lead you to start doing more investigation. Buying a company strictly on using those metrics that Andrew mentioned is not the best idea. They’re a great way to try to find companies and then start doing further analysis to decide whether you want to invest in it or not. Yeah, great points. I think we mentioned it a couple of weeks ago to like almost having a journal of yeah, why you’re buying a stock and being able to reference that in the future. Yeah, exactly. And I think it also illustrates, you know, the importance of using longer periods of averages to decide on looking at just one year or two years. Because then you can see trends, you can see whether the company is, you know, for whatever reason. And you can see the good and the bad of a company. I’m not saying anything bad about the company; I’m just saying these are all questions that I want to find out more about. So that  leads into a big picture, which I don’t think, you know value investors

Andrew:                              26:12                     I think we, we have a lot of things that we look at and tend to help us get great results. But something we don’t talk about maybe enough is growth. And I think buffet tries to pound the table about, hey, make sure you’re getting growth too. Sometimes that’s more important than, than really, what does that quote he says, it’s better to buy a wonderful business, a fair price rather than a fair business or the wonderful price. And so, as you’re looking, you mentioned multiple years, maybe a three year or five years, how do, how do you start to look at growth when you’re looking at the new stock and what questions and or answers are you making when you’re doing something like that? Let me ask you first.

Andrew:                              27:00                     That’s a good question. I guess when I’m looking at growth, for example, I look at two things. I look at the growth, the revenue growth, and I try to do it for over ten years. And so that takes a little bit of a little, I have found an easy way to look at a whole complete ten years. You’ve got ten years on your screen yet you go wow. Barrio. Barrio. Okay. Well, you know what guys? We’re, we’re just going to, we’re going to do this right now. All right, so what is it? QuickFS.net. So what I like about this website as well as you’re pulling that up, they also do the r, the return on equity, and the return on assets. They also do what’s called return on invested capital, which is a slightly more advanced metric that some good investors like to use.

Andrew:                              27:57                     They will also display some of the ten-year growth numbers. So what’s called a CAGR company compounded annual growth rate like how much has this grown every year for the last ten years. So, for example, Greenbrier companies, Gbx has a ten-year CAGR for revenue of 6.9%, so they’ve grown revenues 6.9% every like 6.9% a year over the last ten years for eps earnings per share. They’ve done that 14.7% per year, which is fantastic. And I think; generally, stock prices will follow earnings and eps growth over a long enough period. A couple of disclaimers I would make about that. And something to add as a question when you’re looking at because this is something that I emphasized in 2015 2016 I’m in the eLetter. And I think when you’re looking at growth and when you’re looking at stocks in general, it’s going to, here we go with the tangent, it’s going to evolve.

Andrew:                              29:09                     And I think that’s a good thing. Because if you’re using the same approach every single month, you’re going to get the same type of stocks. And I don’t think you’ll have a nice diversified portfolio. So I think it’s good to have different reasons to buy stocks every single month. And for that to evolve. And, as you, become a better investor, you start to figure out for yourself which qualitative factors make more sense or which growth factors make more sense to you. A and I intend to get better results. I’ve had some fantastic results and, and I’ve, I’ve researched that on how even ten years, you know, a ten year track record, which sounds like a long time helped like the next 10 to 20 years can still have huge amounts of growth even the last ten years had huge amounts of growth.

Andrew:                              30:03                     Something that I’ve seen in my research and something that’s played out some of my best stocks. I think lam research was one of those. Also, errands come to mind that one had huge tenure numbers. But when you’re going back to that, when you’re looking at the ten-year numbers, be careful because a calculation like the one on quick fs on that we’ll do one year and look at one year, so it looks at 2018 2009, and that does a formula equation for that. You would want to spread that may be out. So I like to use like a three-year average, so maybe I’m looking at 2009 2008 and 2007 taking the average of that and then comparing it to let’s say 2018, 2017, 2016. Taking the average of that, so you’re not getting those one year’s swings like Dave mentioned and maybe getting a more fair representation on how the growth has been.

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Dave:                                    31:04                     I could throw in a note on that too. Something that I, I play around with a little bit too is looking at the median of the numbers as opposed to an average. Because one thing I’ve noticed when I’ve done some analysis of companies when you try to do an average of companies, sometimes you may have one low year and you may have another high one, and those tend to skew the numbers. And you know, if you have a year, we’re, you know, your revenue growth is 38% one year, and then you have another year that it’s down 14% or 22% those and those are abnormal. Then those are things that can throw off your numbers and everything that I have come across in some of my readings, which I think is not a bad idea to look at a, as you’re doing a little more analysis of the company. As looking at how the company did during the recession and comparing those three or four years of how the company did during the recession compared to now, it’s not apples to apples obviously, but it can give you an idea of how will this company do if there is another downturn in the market.

Dave:                                    32:15                     So as you’re looking at investing in a company longterm, you have an idea of hey, Hormel or Disney did great during the recession or not as poorly as other companies. Then that could be something that could give you a lot more confidence than the performance of the company going forward because there is going to be a downturn someday. It’s just an eventuality. We don’t know when it’s going actually to happen. So that’s my thoughts. Yeah, those are excellent.

Andrew:                              32:40                     I agree with that, and I should use medians more. Do you have any more thoughts on growth, or should we move on to dividends?

Dave:                                    32:48                     I guess one thing that I wanted to talk about with growth is besides revenue growth and other aspects of growth is looking at when you’re looking at the earnings. One thing to keep in mind with the earnings, and this is something that we’ve touched on a little bit in the past, is there is a growing trend towards share buybacks. And that’s been a really popular way over the last, you know, 15, 20, 30 years of companies returning capital to US investors. And one thing to look at it. Let’s say Andrew, and I was talking about this a little bit off the air. Let’s say the company’s revenue growth is modest at best, but its earnings growth is skyrocketing. Well, a big reason for that is there’s gotta be a couple of ways that can happen. One is they’re cutting costs, which is Andrew mentioned to me is not sustainable.

Dave:                                    33:40                     You can only cut costs so much and still be effective at doing what it is you do. The other aspect of this is as they do more and more shy share buybacks, eventually they’re going to run out of stock to buy or sell. So there has to be a limit on that as well. So those are things that you might want to necessarily keep in the back of your mind because as the laws of economics work, you know, you only have two ways to make more money. And that one is to make more money to have more sales. And the other one is to have the costs be in line or reduce your costs. And if you can’t do that, then you’ve got to do something else to generate more earnings and one way to do that is to do share buybacks and if you see that over a long period. That would be something that would maybe, you know, as Andrew mentioned, you’d want to see the revenue increase at some point. I mean certainly seeing the earnings go up as great. It means the company’s doing a good job of allocating their, their resources and using them cost-efficiently and where they are and also buying back shares. But eventually, that has one of those things has to either plateau or bottom out. And if the revenue’s not going to grow, then the company eventually will not be able to continue to grow.

Andrew:                              34:55                     We, yeah. First off, a hundred percent second off, do we want to open that can of worms where we talk about a debate on whether you would buy a company that’s maybe short term flat line revenue or declining revenue. Should we say that for a different episode? Yeah, let’s save that for a different episode. That could be a big can of worms. Okay. So yeah, obviously we could talk about growth until the cows come home. But hopefully that gives you like a good starting point, and a good, some good ideas on questions asked when it comes to the growth and how you evaluate that dividends something you consider there. I do. Yes. And W W why do you do, what would he look at?

Dave:                                    35:43                     What would I look at? I would look at, well one is the actual dividend being increased. W W at whatever rate to that would be; I would love to see more than not, but you know, you have to take that into consideration of what all the things that are going into the company. So I would want to see the growth of the dividend. I would also want to look at the payout ratio of the dividend that they’re paying me and looking at whether that’s sustainable or not. And some of that is going to have to do with where the company is in their life cycle. For example, somebody like Coca-Cola who’s been around for a long, long time and their growth is not going to be quite as much as say Amazon for example. That being said that all the money that coke makes instead of them plowing it back into the company to try to grow the company more, they’re going to use it to pay us a dividend, and they’re going to use it to buy back shares.

Dave:                                    36:45                     And so those are the things that, so that ratio that you’re looking at, it might be quite a bit higher than, for example, Greenbriar would be because they’re not, they’re not in the same place in their life cycle as a business. And so if their payout ratio is lower, that to me is good because it also still shows that they have money, that they could do other things, they can reinvest it in the company, they could use it to buy shares back. So there are other aspects of that. So those are two of the things that I look at within regards to dividends as the drip king. What are your thoughts on the dividend payout ratio?

Andrew:                              37:22                     I think if you think and conceptualize about the life cycle of a company, and one reason why I’m starting to stray from this, but I might, I might go back, it depends on what opportunities are out there, right? But even you might look at like, let’s say you’re looking at a stock and you love everything about it, but the yield is so low. Like, let’s say you’re getting, it’s like, well, why would I get the point 25% or 0.5 or even like a 1% yield? You know, why, why would I go for a stock like that when I can get stock at like 3% or 4% yield? You know, that that’s going to be a significant difference in the, on the onset, you know, with a 3% versus a 1% that’s three times more in dividends that you’ll be receiving.

Andrew:                              38:12                     But to your point, when companies are in the growth stage and, and maybe they’re only paying out 25, 30% of earnings so they can reinvest the rest in the business and they’re able to grow the business at a very high rate, well that’s good for shareholders. It’s good for your dividend compounding as well because those shares that you own are getting more and more. So that’s, that’s a factor in that goes to what you’re saying about Coca-Cola versus maybe even Greenbrier. I mean, based on their growth metrics, it seems like maybe they’re a younger growth type company and so the fact that they don’t pay out as much as far as the payout ratio goes might not be a terrible thing. And I’ve done some research on that too, where I’ve seen some of the best dividend compounders over like let’s say 15 years.

Andrew:                              39:03                     Some of those have started at a higher yield like m, Altria group, the cigarette company, ticker symbol emo. They were one where you started at like a crazy high yield, and they also were able to continue to grow earnings for a superior rate and grow that dividend and that it made a lot of people very, very wealthy the people who stuck through it and reinvested. But another example would be like a Walmart. I think they started, you could have bought Walmart in the 1980s, and you would have only gotten like a 0.5% yield. But because they compounded that at such a high rate and their, their dividends grew so much from a small base and your shares grow, even if it’s just a little bit, you start that compounding snowball then the different, the results are very high at the end.

Andrew:                              39:59                     And so even a company like Walmart, they also had crazy, crazy levels of returns. And you’re talking about growing tens of thousands and so hundreds of thousands and just from the compounding. So to your point, I think power ratio is good, a good idea to look at, but you know, one that’s lower isn’t necessarily bad. If a, if the company is growing and one that’s higher isn’t necessarily bad because they might be at that mature stage. And so imagine like a buying a stock like Buffet has done with Coca-Cola. I think I mentioned this example a couple of weeks ago, but if at the beginning of their life, they were growing, and you were getting those dividends, and you were reinvesting those dividends. So let’s say instead of one share, you own like one and a half shares or something, so you own 50% more, you’re going to get 50% more of the dividends that they’re paying as they’re matured.

Andrew:                              40:59                     And so, you know, as a company changes their philosophy or changes or priority from re-investing to giving dividends back, while all of those little, a fraction of shares that you’ve in the s accumulated for yourself and reinvested those, you’ll get such a bigger proportion. So I hope you can illustrate how that, that huge, it’s like a huge funnel. And at the very end, you want that company to be paying you all these fat dividends, and it’ll just multiply. You’ve reinvested in anything in the beginning, and that can lead that can, that could fund return, that could fund the retirement, that could, that could give you serious income stream from small little dividends you started 20 years ago, and that could give you this huge dividend stream now. Because the amount of dividends they payout is so high now that even a little fraction of a share that you picked up in the early years now becomes a huge dividend and the huge income stream for yourself.

Andrew:                              42:02                     When I look at dividends, I also look at, you know, what their history has been Seeking Alpha, a tool I’ve been using more and more lately. They also have a dividends Tab so you can look on there. It gives you what the dividend yield is, what the power ratio is, the five-year growth rate, which I don’t know why for this company it doesn’t show up. But then dividend growth as well. It gives you how many years of dividends have they paid out consecutively. So in general, I like to see at least five years, but I’m not necessarily disqualifying a company if it only has one or two years. I’ve bought stocks historically that didn’t have any dividend growth and my regret that in hindsight, I’m probably making that more of a focus as a, as I move forward. But you know, w with the dividend picture’s similar with the growth picture, similar with the value, you know, we try to merge all those three.

Andrew:                              42:59                     I know I do with, with with the drip philosophy that I tried to push but also the margin of safety, emphasis on the safety. And then obviously growth is something we probably should talk about more. But those three things make for a nice hybrid of, of driving returns. Enough talked in the past about how getting that value on, on a dividend compounders kind of like injecting it with gross serum and, and you start with a, with a nice head start on the compounding. I sometimes think some of these metrics you have to figure out how you’re going to prioritize them. And maybe think about what’s the angle here with the stock? You know, a, I talk about how I split my portfolio into regular positions and dividend fortress positions, and you’re not always going to get a great dividend compounder opportunity every month.

Andrew:                              43:51                     So maybe you look at a stock like a Greenbrier and maybe, you know, again, I’m not trying to say Asia by herself, but maybe your angle for this isn’t, Hey, I’m going to try to get income for 20 years on this. And hope it’s around for 20 years, but maybe your end goal here is I hope for a 50% pop, right? And so that can, where that can be where a value, a value play comes more into play. And so you’re like, well, the growth isn’t as great as this other stock I see. But the valuations so much better. I could see it having a 25% pop or a 50% pop and then so maybe you’re in and out of that stock within three to five years. And that you knew going on the onset that that was the goal that you were setting.

Andrew:                              44:36                     And, and so that’s why you prioritize the valuation versus the growth or the dividend that can work the same way on the opposite side, you know, where you, you go back to the buffet quote. A wonderful business or the fair price and maybe you’re looking at this as a dividend compounded that you’re going to hold for 40 years. And so you’re okay that maybe the valuation isn’t as great as you’d like to see it or maybe the growth hasn’t been as great lately, but over the long term, it’s been fantastic. So you’re okay. So there are always trade-offs. There are always things to consider, and there’s always different reasons for buying stocks and different maybe exit strategies for different stocks. And so I’ve been experimenting with that, and I have me, my portfolio is structured that way. And maybe that’s something you want to do too.

Andrew:                              45:23                     Or maybe you want to be the hardcore hammer, hardcore value guy or ham, a hardcore drip guy. That’s cool too. Everybody has what they’re comfortable with and what they’re not. And so maybe having an end goal in mind and maybe prior, maybe that colors your decision making on, on that what you’re prioritizing, whether that’s the dividend history, the dividend, where it stands now, the valuation as it is now. And maybe the growth, whether that’s where it is now or where it’s been historic. Well, that was all excellent. Yeah, those are all great points. So I guess Kevin asked at the very beginning, he says, I like the other numbers a lot and I’m just wondering could this be a value trap just because it’s a smaller company, whether you think, oh boy as a, just an overview of looking at the company. I would say there are some positive things to investigate, and there might be a few negative things to investigate.

Andrew:                              46:30                     But overall, you know, I guess the first thing that would make me think that it’s not a value trap is the deck to equity is low. So, the opportunity for the company to go bankrupt quickly is pretty negligible. They don’t look like they are doing anything extreme that would give you pause to think, you know, Ho Hey, what’s going on here? You know, the revenue has grown quite a bit since 2009. That’s always a good sign. And along with that, their gross profit has grown. So I mean, there are some definite positive signs that the company and the fact that they pay a dividend they’re in a relatively easy industry to understand that they make things. I mean, it’s not Uber complicated were some of the texts, things, you know, you read some of the 10 ks for the tech ones, you’re like, Whoa, Whoa,

Dave:                                    47:32                     I know they’re using English, but I don’t exactly understand what they just said. You know, I, I guess just a quick overview of everything. It doesn’t look like it’s a value trap to me. As somebody who got involved with a value trap, I. E Gamestop I don’t think that this strikes me as that company. What are your thoughts?

Andrew:                              47:52                     So I’m going to be very he asked, do you think it’s a value trap? Specifically because of the size. So I would not buy this stock because of the size. So I have like, I have a few hard and fast rules that helped my decision-making process and helped limit my, my sphere. And that’s just a reflection on where my risk tolerance is. So you’ve guys have heard in the past we had a debate on the negative earnings thing. That’s just like a hard boundary for me. I’m; I’m not owning the stock that has had negative earnings just released. Okay. The second one is it has to be a valued, sharp indicator strong by that simplifies things for me as well. And make sure of that. For me, valuations are at least reasonable. And the third thing is this, which is the size.

Andrew:                              48:50                     So I’m not buying any stocks below 1 billion. And I wish I remember which episode we went much deeper. I think it was something about microcap, but you would have to go back in the archives and check that out. But I’ve mentioned how cliff notes, right? I mentioned how I would buy a stock between one to 2 billion. I prefer over 2 billion, and I’m talking about market cap here. But as you get below 1 billion, I think there’s just a ton of risks there. But you know, too, to Kevin’s point here, it is close to a billion. It has, at least from the surface level, it seems to have all the right numbers going for it. So that’s your call, and whether you think it’s a value trap or not, I would say I wouldn’t personally buy it because it crosses that boundary, but it does look very interesting.

Dave:                                    49:50                     Yeah, I would agree. It’s, it’s a, it’s an intriguing fine for sure. I mean, there’s, like I said earlier, there are some things about it that are like, hey, it gives you pause to like, this might be something to look into to investigate further. But I would probably tend to agree with a little bit with Andrew on the little, the smaller market cap that would give me pause. It certainly wouldn’t be something I would immediately go, Yep, I’m gonna dig into this. It would be something more along the lines for me that I would probably throw on my watch list and keep an eye on it. And as the market starts to realize, hey, this might be a really good company, and everything starts to come back to more of the return to the law of averages, I guess there is the best way of putting it.

Dave:                                    50:40                     I think that the market cap could certainly arise. And when it does, then that would be something that might be worth investigating further and an in actually investing in it would, the lower market cap would give me a little bit of a pause for sure. But it’s certainly not a, you know, a hard and fast. No. but it would be something that, what I would want to consider or I guess, I mean to play devil’s advocate, again, I’m not an expert on this, but that does seem like the industry is smaller — like the railroad cars specifically manufacturing, is smaller. I, I, you know, I don’t know what’s, what’s the growth are, are there growth catalysts for that industry? What, what’s keeping the railroad from doing that in house rather than purchasing it? Right. So many factors and, and when you’re that size, like one big competitor, could come in and just, and I don’t know, could, could Buffett come in and like buy up the whole industry?

Dave:                                    51:40                     Who knows? I don’t think there’s a lot of ways you can say yes or no for wanting to either follow the rule or, or break the rule on, on the market cap thing. For example, for know for sure. I guess one of the things I wanted to throw out there when you’re talking about a make or break as far as the company goes, the debt to equity is something that Andrew and I both agree on and it’s very low, which is a very good sign. But one thing that I would investigate with them with Greenbrier would be who their customers are? And it will tell you in the 10 k where they’re selling the, they sometimes the good companies will tell you who they’re selling to and if you find that, for example, Greenbriar has one customer and they’re relying everything on that particular customer. That would be something that I would want to pay very close attention to because if you’re throwing all your money into one company and for whatever reason that contract expires, or they find somebody else or that company that they’re selling to goes out of business, then groom buyers, you know going to be in serious trouble.

Dave:                                    52:54                     So those are things that I would want to investigate as well. As far as in regards to a value trap or not. Excellent point. Yeah.

Dave:                                    53:03                     All right folks. Well that is going to wrap up our discussion for this evening. I hope you enjoyed our conversation about this company called Greenbrier and our thoughts on where we find the information and how we do an initial analysis of a company and some of the things that we look for. I discovered a great new tool, a quickfs.net, and that was, awesome. I’ve been at it since Andrew told me about it and fantastic. Two thumbs up. I also wanted to mention that we would love to get some great reviews on iTunes. So if you guys are enjoying what we’re doing, if you could take a moment and go to iTunes and give us a five that would be fantastic.

Dave:                                    53:43                     The more people that, the higher the reviews we get, the more people we can help because people search based on the popularity of shows. And that’s how iTunes will do it. So thank you for any positive reviews you guys give us. We love to hear from you guys again and keep sending us these great questions. This is a lot of fun. We enjoy trying to help you guys. So without further ado, I’m going to go ahead and sign this off. You guys have a great week. We’ll talk to y’all next week and best with a margin of safety, emphasis on safety. Talk to you later.

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