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RTC14: Five things to look for when picking an investment · The Curve

• 0:00
  Welcome to the Curve Podcast, a conversation for women who want to learn more about money,
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  their money for the future they want to have. We're all busy in the pursuit for financial
• 0:12
  confidence and increasing your wealth should be a simple one. That's why the curve was created.
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  This podcast is for women to learn about investing in a non-scary or intimidating way.
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  With short episodes, you'll have time to learn, digest and understand everything to do with the
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  world of investing. Don't expect to be an expert on day one. No question is a silly question.
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  If you're asking it, so is everyone else. So thank you for being here and for listening,
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  because together we really can raise the curve. Welcome back to Raising the Curve. We have a fun
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  new game to play today. This is called the Stock Story Series. I'm really impressed with your
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  alliteration. I know. I had to concentrate for that one. So creative. So how's this going to work?
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  This is where we put in what we've learnt into action. So we pick stocks and we discuss whether they
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  should be a buy, a hold or a sell. Now, big, big caveat. This is not advice. This is purely my view
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  on each stock and people might have different views and that is fine. Oh, can someone if you do
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  disagree, please get in touch. I'd love to have like a little, you know, a debate, a debate,
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  a thick and one of our lustres. Yeah. I mean, it happens all the time. You've got to remember every
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  time you're trading, if you're buying a stock, someone's selling it to you and vice versa. If you're
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  selling a stock, someone's buying it off you. So there's always different views out there. It's
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  almost just like a really good life analogy, isn't it? You know, you see things so differently
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  to other people. Yeah. And it's just having confidence in your idea and be like, yeah, I'm going
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  to buy it. Yeah. I back myself. Yeah. Yeah. Okay. So do I need to choose a business? Yeah, maybe
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  let's stick to a New Zealand business is something that people understand well. So a well-known company.
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  Yeah. For our first one. Trying to think of like one of the most well-known companies in New Zealand.
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  Maybe what about a return as brusco? Is it a boring one? No, that's actually really good because
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  it's listed. Okay. There's actually very few listed retailers. So I gave you a hard basket to choose
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  from. Oh, really? Yeah. But brusco is a good one. Let's go with that. Okay. Yeah. When did they
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  listed? They've been like listed for a long time. They have been listed for a long time. So
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  brusco's was actually founded. Gosh. Back in, I want to say like a couple hundred years ago. What?
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  Yeah. So it started in the UK actually and then about maybe 150 years ago. It came to New Zealand
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  as brusco group with its first store in Dunedin. But now has nearly 90 stores in New Zealand.
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  And some people might not know this, but it actually owns rebel sport as well.
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  Does it? Yeah. And living and giving. It's not many living and giving stores anymore.
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  Do you know this about a lot of companies? Is that because there's only, you know,
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  there's not that many New Zealand listed companies? Yes. Yeah. So when you have followed them for a while,
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  you're well aware of their story. Yeah. But it's also, I didn't know that they own rebel and
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  till I started looking at it from an investment point of view a few years ago. So quite
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  interesting. But you know, when you start looking at these companies, you're like, oh my gosh,
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  you own that and that and that. So is that like Facebook owning what's happened in Seren?
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  Yeah. A lot of people might not know that because you just see the brands. You don't think of
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  the as the group or the parent company. So and then Rod Duke, who is the current CEO, he actually
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  bought the brand off the former owner in the 90s. So it's kind of been in its current form since
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  the 90s. So it's been around as we know it really. 30 years. Yeah. Good. I'm nearly 30. So
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  90s baby. And some of you may think, hey, but there's rebel in Australia too. And they're not,
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  they're not connected. They kind of bought the brand over here and started rolling it out.
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  But there's actually a funny story. And I like funny love story. Maybe my sense of humor.
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  But I remember hearing this when I first started covering Briscoe Group. And it was about how
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  Rod Duke actually came up with the idea or wanted to roll out rebel sport. And the story was,
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  now this is probably had many iterations. So it might not be 100% accurate. But he was playing
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  tennis with friends. And he needed a new tennis record. And he asked his friends. He just he'd
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  moved here from the UK. I assume because he obviously didn't know New Zealand. Well, and he
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  says, where can I buy a tennis record? And they were like, oh, he go to the store, all the store.
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  And he goes, okay, cool. He's like, I need some new sneakers too. Where do I go? And they
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  mentioned another handful of stores. And he's like, oh, what about some clothes as well for
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  to play tennis and they were like, oh, we need to go to these stores. He's like, what? There's not one
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  place I can go to get a whole tennis out. Duke is clever. And he was like, hmm, there's an
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  opportunity. And hence, rebel sport was great. I love that story. It's not that funny, but I love
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  the story. But you know, it's kind of you're solving a problem that's such an entrepreneurial
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  mindset because it's him going, hang on, there's an opportunity is to get all that product into one
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  store so that I can go to one shop and even ask him go to one shop to get that. It feels like a no
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  brainer now doesn't have so many shops to do that, but they wouldn't have been back in the day.
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  Yeah, that's how rebel sport was created. Anyway, so let's look at this company brisco group
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  from an investment point of view. Now, our five investment criteria of structural growth,
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  durable competitive advantage, visible revenue, aligned management team is strong balance
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  cheese. Let's see how this company kind of plays into those. So firstly, structural growth with
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  brisco group, you've got the brisco's stores and you've got the rebel sport stores. Now,
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  now both of those are tied to different drivers, if that makes sense. So, home wears very much
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  tied to the housing market. If you're feeling confident, your house is worth more, or you've bought
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  an additional house, you bought a beach house, or an investment, investment property, you'll need
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  to go and buy appliances, iron boards, all that kind of stuff for that house. So, the success of
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  those stores is kind of tied to the underlying economy, house prices, the wealth. So interesting.
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  Yeah, and it just comes back to think about yourself. Whenever you go to brisco's, it might be that you
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  have moved into a new flat and you need appliances, or you've just bought a house and you need to go
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  and buy that new iron, all those new cups and sources, or you know someone else who has
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  and you're going to go buy them a gift. So, it's kind of you think about your own shopping habits,
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  and when do you go to brisco's? And that's kind of why you're wearing askos to brisco's.
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  Oh, I was like, do you hear that? Oh my god, you're a stomach. Wow.
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  My god, that was so loud, sorry. So, say the housing market drops. What would be the argument
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  that maybe brisco's might not do so well? There will be other underlying issues within the
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  economy that are driving those house prices falling, which means that people won't be feeling
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  as confident, therefore. Oh my god, this is so loud. I wonder if there was some water,
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  have some of this water. I wonder if you can hear it in the recording. Wow, it's like a grumbling
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  beer. It's a little half way through. So, if house prices are falling, there's probably other issues
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  that are going on in the economy, which are making those house prices fall. And if you're not feeling
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  confident about the outlook, or you know that your house is worth less, you're not going to be
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  buying beautiful crockery. Exactly. You're not going to be going out and buying that extra
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  set of plates or tell rail or whatever. Yeah, it's kind of you all betting. You might be like,
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  oh, I'll just stick with this one for a wee bit longer. So, it kind of comes down to overall
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  consumer confidence. On the other side is rebel sport. This is a kind of a much easier train to
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  identify, which is people being more active, more increased focus on health and wellness,
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  means more people wearing active wear, playing with sport, COVID, people having nothing else to do.
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  Exactly. We endure gym, people will need to go buy weights and things for lockdown. No one
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  wearing normal clothes on Zoom meetings anymore. Speak of the devil, I'm in my active wear.
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  My active wear. Speak of the devil? I don't think that's right, Tim. No, it's a case in point.
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  Yes, you're right. So, that's really played in two strong sales at rebel as well. So, they've
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  diversified their offering, home wear, sports wear, and they've been affitting from kind of two
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  underlying growth trends. Now, the second one is a competitive advantage. Now, this one is a bit
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  difficult or maybe a bit weaker in terms of the investment case, but it kind of comes back to
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  the story that I said at the beginning with the Tina story. Brisco's and rebel both have really
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  strong brands. And if you're like, oh, I need sportswear, rebels the place you go to.
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  Oh, I need appliances. Brisco's is the place you go. The top of mind. Top of mind brands to go
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  to find what you need. At the same time, there are also other stores, like sports stores or
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  home wear stores, but I know what you mean. They've definitely got a good name for themselves.
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  A mass market would be going there to shop. Thirdly is the visible revenue. With this one,
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  we would look at historical financials with Brisco Group. Now, they have had an amazing track record
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  in terms of what they've delivered over the long term. We have talked about how past performance
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  and education future turns, but when it comes to earnings growth for a company or for a business,
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  if they have consistently delivered earnings growth or revenue growth over a very long
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  period of time, you can have some level of confidence that they will do that in the future.
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  Rather than investing in a company, that's like earnings up 100 percent, earnings down 50
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  percent, like that much more, because I would lose all my hair and be singing that kind of company.
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  But yes, okay, so that's stressful. We don't want to go down very stressful. So you'd rather
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  invest in a company that has continually delivered a stable return and earnings, not share price
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  earnings. Also with Brisco Group is that they are rolling out stores. Remember, we're looking
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  in the future and that gives you some help, some confidence in the fact the business is going to grow
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  because they're rolling out stores, they're expanding their footprint. That means more sales,
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  which means sales growth and one metric you should look at when investing in a retailer is
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  same store sales growth. I see. And that just means kind of what it says is,
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  how is that store growing? Because you can roll out heaps and heaps and heaps of stores and your
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  sales might look like it's increasing, but if your same store sales growth is declining,
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  then the business model as a whole is not exactly because if you start rolling out stores,
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  which eventually in any market you reach a cap, then the business is going to go backwards.
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  So it just shows a healthy store if you're constantly growing in your same store sales growth.
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  And we're not talking huge amounts. Three, four, five percent, same store sales growth
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  is really healthy for a retailer. Basically, you look at the overall picture and then you also
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  zoom in on one store just to make sure that customer behaviors are actually engaging with what
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  they're selling. Which means that people want to keep coming back, there's new products and that
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  people, more and more people are coming to that store. Aligned management team. Now this one is
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  key for Brisco Group because Rod Duke, the CEO owns over 70 percent of the shares. Wow, does he
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  still? Yeah, I know. So I kind of want to meet Rod, he sounds cool. So you can be pretty confident
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  that whatever decision he makes for the business is going to benefit him, but also benefit the
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  shareholders because he is such a large shareholder. I'm already on team Brisco.
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  I reckon Brisco is a win. So yeah, there's been a lot of research that has been done around
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  high inside ownership, which means when when insider in the business,
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  either a founder or a CEO owns a large amount of stock and the outperformance of those companies,
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  there's been tons and tons of research that shows because of that alignment, those businesses tend
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  to do well. And lastly, strong balance sheets. So this just shows how much cash they have. This just
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  shows if they hit a bump like COVID and all of the stores close, they still have enough money to
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  exactly to get to stay alive. So they've got $40 million of net cash. And what I mean by net cash
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  is your cash minus your debt is your net cash. So you could have $100 million of cash,
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  but then $200 million of debt. And therefore your net cash is actually net debt, if that makes
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  sense. So it's really good to look at net cash and these guys have $40 million of net cash.
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  That's a lot of money. Yeah. So they've got flexibility and that could be used for a rainy day.
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  It could be used to accelerate growth in the business, just gives them a bit of ammunition.
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  Now with investments, there's always risk, risk, risk, risk, risk. So with every investment,
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  there is risks. And this is also the case with brisco group. So some of the risks to be aware of
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  is that when you have a really successful business and they deliver really high growth rates,
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  it becomes harder and harder to comp those growth rates and still grow positively. Does that make
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  sense? Sort of. So say a store had a really fantastic year and grew 20% in order to grow again,
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  it needs to grow even higher than that 20%. So think of it maybe in reverse. So you've got a store,
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  it does really badly, sales for 50%, then to grow off that lower base is a lot easier. So if you think
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  of that on the flip side, if you have a store, it does 20%, then at the next year, you've got a
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  higher base that you have to grow on top. Yeah, so it's just okay. Just means it becomes
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  harder and harder that this company has shown that they can continue to deliver on that growth,
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  which is great. Also during COVID, a lot of us may have heard and you might have realized that some
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  of your own deliveries are being delayed is that there's a lot of logistics issues at the moment.
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  So trying to get product out of China or getting something delivered from America,
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  even Australia is annoying. Just takes longer and longer and it's so much congestion and this
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  leads to product delays. So you might go into the store and there's stock or there's not enough stock
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  of one product, which means loss sales for them. So it's just that's something to be aware of.
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  And one thing you mentioned before, what did I mention? About competition. So yes. So for
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  rebel sport, for example, there's international brands that are coming down here into New Zealand now,
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  that's earnings competition. So yes, well, it does have a strong brand and a good
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  market position. Will that last? So that's just something to be aware of. If you kept hearing about
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  American stores opening up down here or you saw another sportswear brand rolling out heaps
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  stores, then that's just something to be aware of. Another thing to remember when you're making
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  investment is to look at the financials and we've kind of spoken about how brisco group has done
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  really well, historically, I mean, how consistently the delivered earnings growth, which is great.
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  So their earnings have delivered nearly 20% per year on average.
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  Sorry, just quickly in dropping this episode to let you know I've got quite a grumbly stomach,
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  we're going to continue. Oh my god, it's getting too much time. Sorry if you can hear it. So
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  their earnings have delivered nearly 18% per year on average for the last 10 years.
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  Wow. So if you're looking forward, if your investment horizon is 10 years in the future,
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  you can have some element of confidence that will hey, they've delivered that in the past.
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  I should be able to maybe get something similar or even half of that is pretty good. 10% return
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  in terms of earnings as share prices tend to reflect earnings. So another thing to look at is
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  valuation. Now, gosh, we could spend 10 podcasts episodes on valuing a company. It's pretty
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  complicated. So I'm just going to keep it really high level here. But valuing a business just
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  means being able to figure out what the share price actually is telling you. So $1 share price of
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  $6.25. What does that actually mean? Is that more expensive than a stock price of $3? Yes,
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  in absolute terms it is. But you need to look at it in regards to the earnings of the business.
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  So don't take a share price of $6 in a share price of $3 is one being more expensive than the other.
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  It all comes down to earnings. So you just need to be aware of that. And with Brisco's group,
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  it also has a really good dividend. Now, this is something that we'll talk about in another
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  episode, but do they give dividends back to? So they give part of the earnings back to shareholders
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  as a dividend. They effectively don't need those earnings to grow the business. They retain
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  some of them and then they give some back to shareholders. So it's really important to look at a
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  dividend yield or a dividend, the percentage of the dividend in respect of your overall return.
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  Because you might be getting a 5% dividend yield as you do with Brisco Group,
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  and then a share price might return 10%. That's 15%. So you need to really look at it and take
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  it all into consideration when you're looking at your overall return. And some companies might
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  have zero dividend yield. That's fine, but you should expect a higher share price return then.
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  Can we get to the bit where I get to choose if it's a buy sell hold, etc? Yes, because I think I know
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  the answer. Okay, buy hold or sell, so I would say if you don't already own it, buy it,
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  and I would say if you already own it, hold it. Yes, nice. Yeah. Is that a good answer?
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  So this is, again, not advice, but I would agree. I would say it takes a lot of investment criteria.
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  It's a very high quality, stable business, which should be reflected in the share price of
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  therefore in your investment. And I think, yeah, one of the main reasons having to see it.
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  I was about to say that. Is it because Rodjuks there? Yeah, and he's just because of how much
• 19:04
  stock he owns. That's a huge amount. For me, is a big, big green flag? Yeah, never heard that,
• 19:12
  but we should totally go with the green light. Green light. It's something great.
• 19:17
  Yeah. And one thing I try to think of when I'm investing and what I've heard from another
• 19:23
  fund manager actually is, is take a desert island approach. Now, what do I mean by that?
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  So it's looking at me like, what? Because I'm already hungry. So the thought of being trapped
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  on a desert island is terrifying. That just means if you were to buy a company and then
• 19:38
  be on a desert island and have no idea of how your investment was going, and then you came back
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  from the desert island, say five years later, would this investment have grown? I think so.
• 19:49
  Yeah. And so according to the desert island approach, it's a buy. It's a buy. It's a buy.
• 19:55
  For me, it's a buy from Vic. Oh, that's really great. And if you have it, you would hold it. Yes.
• 20:00
  Yeah. Hey, that was really interesting to go through all of that. It's so much research, isn't it?
• 20:06
  Yes. I mean, kind of amazing that you just know all of that stuff. You've obviously looked into
• 20:09
  the company before. Yes. Yeah. So I've covered, I covered New Zealand retail for a long time.
• 20:15
  So there's not many actually listed. There's the Warehouse Briscoe Group.
• 20:19
  Kathmandu, Michael Hill. One of which I would say, Helen Stein's
• 20:23
  fairly successful business. Helen Stein's the same. Yeah. Yeah. As Helen Stein's and Gleism's the same.
• 20:27
  Helen Stein doesn't see another retail. You wouldn't know that they were the same. Yeah.
• 20:31
  And Warehouse owns torpedo seven. Do that. I just bought a tent bit from there the other day.
• 20:36
  A tent bit? It was like, it's one of those annoying inflatable tents. And one of the cylinders
• 20:42
  where you can deflate it. I went to the Suppy Festival and every time I would come back to the tent,
• 20:47
  it was deflated. It was an absolute nightmare anyway. Yeah. Ordered a blowup cylinder from torpedo seven.
• 20:53
  Nice. Yes. You were researching without even knowing. Yeah. It was a very unrelated but I guess
• 20:58
  it's not that unrelated. No. Came very quickly. Lots of pros from that experience. Yeah.
• 21:04
  I hence time for some lunch. Okay. Good idea. But thank you so much. That was a really good
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  episode. I actually think it might be one of our best yet. Oh wow. Oh wow.
• 21:12
  Mine is my grumbling stomach. Yeah. Thank you so much for joining us on today's episode of
• 21:18
  Raising the Curve. Please subscribe to the podcast and leave a review on whatever platform you're
• 21:23
  listening on. For more information about the curve, the work we do and how you can learn more,
• 21:29
  head to thecurve.co.nz or find us on socials at the underscore curve nz.