12) A Stock That Pays for Itself Every Four Years! with Trey Henninger

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In this episode, I’m joined by Trey Henninger of diyinvesting.org to discuss a unique take on value investing. Today Trey will tell you about how he beats the market while holding a portfolio of only 5 stocks, what stocks to look at that will…

In this episode, I’m joined by Trey Henninger of diyinvesting.org to discuss a unique take on value investing. Today Trey will tell you about how he beats the market while holding a portfolio of only 5 stocks, what stocks to look at that will give you a huge advantage in the marketplace, a huge company you already know that provides an incredible investment opportunity right now, and a “dark stock” you’ve probably never heard of that hasn’t gone down during the market crash and is still trading at a fraction of it’s true value.

Ney Torres:                        [0:02] Welcome to the podcast, everybody. Today I’m interviewing Trey Henninger. Trey is the blogger from DIYInvesting.org. He also runs a popular podcast since 2017. Welcome to the show, Trey.

Trey Henninger:               [0:19] Thank you. Glad to be here.

Ney Torres:                       [0:21] Can you tell me a little bit more about your webpage and your podcast?

Trey Henninger:               [0:24] Yeah. So, I run a value investing blog at DIY investing.org. On that blog, I write about individual companies that I am doing research on. I discuss my research and I also write about investing strategies, investing philosophy, and just kind of discuss the different ways of how I am working on becoming a better investor.

[0:46] My goal with my podcast and my blog, and the podcast is the DIY Investing Podcast, is to create the blog and podcast that I wish I had when I was learning to become an investor in stocks. And so, I was a self-taught investor. I want to provide a product that I think other self-taught investors would like to have for themselves. So, I tend to focus on micro-cap companies and dark stocks because I believe that’s where I can have the biggest advantage in the marketplace.

Ney Torres:                       [1:17] Thank you. I did it for the same reasons. Tell me, what’s your motivation to do stocks? The people listening right now, they want to know about financial freedom, right? I always say you need to learn stocks and real estate. That’s the way at the end of the day that you are going to make investment income. What’s your motivation? How did you start in stocks?

Trey Henninger:               [1:40] I got started in stocks about 10 years ago. I was trying to find a way to make my money, earn money because I wanted to be financially free without really knowing what that word meant. I didn’t even know the lingo at the time, but I was just kind of wanting more freedom in my life. I wanted to have the ability to support myself without working every day.

[2:06] And what I found in studying things is that if you look at the opportunities for investments, you basically only have those two options for high returns that can be sustainably high returns over long periods of time. If you look at long periods of time of returns 10, 20, 50, 100 years, there’s two asset classes that outperform. One of them is real estate. One of them is stocks. But there’s a bit of a difference between real estate and stocks.

[2:31] Stocks tend to have a higher return when you don’t bring that into account. Real estate tends to have a higher return when you bring that into account. So, if you’re just purchasing everything with cash, stocks are going to outperform real estate. But if you’re allowed to use debt, then real estate tends to outperform stocks.

[2:51] In order to be conservative, I was more attracted to stocks. I also felt that stocks would involve less direct involvement with the day to day. And so, I tended to focus on prioritizing and learning about stocks because I thought it would be something that when I was financially free, you could put money into a stock portfolio, you could have a portfolio of dividend paying companies, and you could live on those dividends. And if your expenses are lower than your dividends, then you’re financially free and you don’t need to work another day in your life. Now, I don’t think I ever will retire, but it’s nice to have that option.

Ney Torres:                       [3:30] Okay. You told me that you have actually thought about going to real estate but you didn’t want to do that. Right?

Trey Henninger:               [3:37] Yeah. I mean real estate’s interesting. Like I said, I think real estate probably has higher returns for someone who prudently manage it with debt than you would necessarily be able to receive from stocks or from a normal stock portfolio but you have to use debt. But the other problem that real estate has is that you have to be involved with dealing with tenants.

[4:04] I sat down with my wife. My wife and I talked about these years ago even before we got married and kind of talking about what our goals were, what our investment philosophies are. She’s not really interested in large degree about investing. But when we were talking about, well, what do we want to do? What do we see our life as in the future? The thing we agreed on was we didn’t want to deal with tenants. When you’re in a real estate investment situation, most the time you’re talking about buying, you know, a single-family house, or a condo, or renting out a room, or some aspect of your buying small piece of real estate, you’re having to rent it out. You’re dealing with tenant problems, whether that’s trying to find tenants, whether it’s trying to make repairs, or dealing with billing, or dealing even with just a property management company. It’s not something that we wanted to deal with in our investing strategy.

[5:03] And so, we just eliminated real estate as one of the areas we would focus on. With the one caveat that we haven’t eliminate… I wouldn’t say we eliminate it completely but we eliminated it in the sense of using it as the means to become financially free. But I would say once we’re financially free, and if you were to say we ever became wealthy, I would consider getting back into real estate, but only when you could purchase very large sizes of real estate all at once, which would be something like buying an entire hotel, or buying an entire apartment complex because then you can hire a whole company to manage it. You wouldn’t have that tenant discussion. But of course, that’s talking in the millions of dollars. Most people aren’t doing that in the early stages, if that makes sense.

Ney Torres:                       [5:49] Which brings me to my next question. You have mentioned you started early in life but with a small amount. I’m trying to encourage people to start also. How much did you start with?

Trey Henninger:               [6:02] So, I started investing with $1,000, which was all the money I had at the time. It kind of goes against what I even recommend people doing in the sense that the conservative and standard approaches before you invest, you need a three to six month emergency fund or something along those lines, then you can start investing. But the nice thing of starting investing with something like $1,000, when it’s all the money you have is… Or it’s probably best to start with $1,000 and not be all the money you have. But when you start with a low amount of money, you can learn about investing, especially in stocks without risking a lot of money. Even if $1,000 is a substantial amount of money to you today, at some point, it won’t be. It’s much better to make your losses and to learn through losing money when it’s only $1,000 than when it’s $100,000 or $10 million, or something like that.

[6:59] Because if you are to lose 20% of your portfolio and it’s $1,000, well, you lost 200 bucks. It’s not fun. But you know there’s certainly much worse losses you could have down the road. So, it’s better to learn those lessons along the way with small sums. And I firmly believe you can’t learn investing by investing a phantom portfolio. You don’t know what it feels like emotionally to lose 30% of your portfolio or to be down 30% when you’re running a fake million-dollar portfolio on some investing website. You need to invest your own money to see what it feels like because that’s the money you save. That’s the money you worked hard to save. And until you feel that emotional angst of this changes in stock prices, you really don’t know what it’s like and you’re not learning what it truly means to be an investor.

Ney Torres:                       [7:50] I agree 100%. I actually think your subconscious connects to another level when you actually have skin in the game even if it’s $10 $20. You just start absorbing and learning lessons that you’re not going to learn other ways, right?

Trey Henninger:               [8:05] Yeah. You just need to be intimately understanding of what that feels like. The math and the fundamental analysis are much easier than the emotions for most people. And so, the emotions are much harder to understand and to carry a grip on than anything else when it comes to investing.

Ney Torres:                       [8:30] True. True. True. True. Most people actually may not know this but for example, Warren Buffett, very well-known investor, like the best investor in the world, is known to just put value in companies out of the top of his head because he kind of does the math in his head, right? He knows about it. So, the math is not the big part. It’s actually having confidence in what you’re going into. Why have you decided to do value investing instead of forex trading or something else?

Trey Henninger:               [9:06] Well, I looked at forex trading. When I was younger, I thought about all different ways to make money. I mean I tried to learn about building an affiliate website back when they were basically true pyramid schemes as they were every website in the world was a pyramid scheme in the 2000s with these multi-tier affiliate programs. Then, I looked at forex trading as the way to make money. Fortunately, I never got into that.

[9:37] The nice thing about value investing that clicked for me is it’s basically just learning to buy dollars for 50 cents and buying things. If you go to the store and the grocery stores has a 30% sale off on beef, you’re thrilled. But when people talk about stocks are down 30%, they get upset. But for me, when stocks are down 30%, I say, “Hey, it’s like this 30% sale on beef. And so, that’s a good deal. I want to buy things that are on sale. I don’t want to buy things that are expensive.” So, it just made sense to me. I think for a lot of people value investing either clicks or it doesn’t but it definitely clicked for me.

Ney Torres:                       [10:20] Yeah, I’ve heard of that before. I can say I was converted in a long period of time. I used to do technical trading. I will start reading about this Warren Buffett guy and how he invests. I didn’t like it at all but with time it just makes sense. I’m just completely 100% Warren right now.

[10:43] So, let me ask you now some more technical questions. All right? Is that okay with you if we talk about some stocks?

Trey Henninger:               [10:51] Yeah.

Ney Torres:                       [10:52] What do you see right now in the market?

Trey Henninger:               [10:55] The market as a whole is really interesting. I mean we’re recording this March 21st 2020 and basically the stock market’s down 30%. If you consider the US stock markets, they’re down 30% from all-time highs, but they’re still pretty pricey as a whole. I mean I don’t buy the general market. I don’t own index funds right now. I do have money in a 401k that can either be in cash or an index fund. So right now, it’s in cash and it’s been in cash for a couple years. But when I look at those index funds, I think they’re expensive. I think a lot of the stuff is just very expensive, and we’re looking like we’re going into recession. But when I look at individual companies, there’s all sorts of opportunity out there right now. I mean, you will have some stocks trading at cheaper prices than they had been trading in 50 years. So, you have like once or twice a century prices on some individual companies, especially in certain sectors that are very downtrodden because of maybe what’s going on with coronavirus or the oil price war. You basically have opportunity in individual stocks. So, stock pickers can make a lot of money right now. But the overall market still probably has a long way to go. I’m fully invested but I think that there’s definitely a lot of opportunity. Yeah, I don’t know if that answers your question.

Ney Torres:                       [12:23] Yeah, sure. What do you think is good realistic goal for somebody that invests their own money long term in stocks?

Trey Henninger:               [12:31] Like in terms of return target?

Ney Torres:                       [12:34] Yeah.

Trey Henninger:               [12:35] Yeah. So, my personal goal with investing is to earn a 10% annualized return. So, I think this is a reasonable goal to set for yourself as an individual investor is to hit or exceed, ideally exceed 10% return each year with your investments. I think the reason I picked that up is because that’s basically what the historic return was for the S&P 500 in the United States was a 10% annualized return. And I think going forward, that return is going to be much lower. If you’d asked me a few weeks ago, I would have said its basically zero percent for 10 years, which is why we’re having a crash. But I think you’re looking at 6% to 8% annualized returns for the long-term S&P going forward just because growth rates are slower in the US, and prices tend to be higher.

[13:21] So, when I talk about a 10% annualized return, I’m talking about basically beating the market by 2% to 4% a year, which I think is a pretty… it’s a really good target if you’re able to hit that. And that’s kind of what I’m targeting. It does mean that most the time I’m buying stocks, I’m only purchasing stocks that I think are going to give me a 12% to 15% rate of return and that’s my margin of safety in case I’m wrong on my estimates. So, most of my stocks return much better than 10% when I’m right. So yeah, that’s kind of what I’m thinking about.

Ney Torres:                       [13:58] I understand. Perfect. What are some webpages that you go back? How do you analyze this? Because I know your technique is to go to very dark small stocks that are really kind of hard to find. How do you find them?

Trey Henninger:               [14:12] Yeah. So, I like using blogs. Some people talk about using screeners. I think there’s two really good ways to find stocks and I think neither of them is using a screener. One, because screeners only screen for things that look good in the numbers already. If they look good in the numbers already, then either the company is terrible because it looks good in the numbers and no one wants to buy it, or it’s a fraud.

[14:39] And so, if you’re looking in screeners and you’re trying to find really deep value stocks, it’s typically not going to work. What I like to do to find stocks is two things. One, I walk around in the world and I see things and when I see a company or a product then I look it up. If I’m out at the grocery stores and I look up say, “Hey, I’m at Kroger. Well, what’s Kroger stock price doing?” Or, you know, I’m buying macaroni and cheese. And so, then you look up the company that makes the macaroni and cheese, Kraft Heinz. It’s stuff like that where you’re out in the world and you’re noticing the products that you’re buying and you’re saying, “Oh, I wonder who owns this.” Especially with food, it’s really easy. You turn it on the back and it says distributed by this company. You can look it up and you can find out who owns it and they’re going to have a stock. Most every company out there in the world that you’re going to go buy, they have some sort of publicly traded company associated with it, whether the product or something like that. Especially, just products that you buy regularly. It’s a good starting point. Especially for new investors because it means that they have that physical association of what is this company. It’s easy to do this with Apple. If you have an iPhone, you’re like, “Oh, Apple makes iPhones.” You have that association. Disney, you might have heard of or seen some of the movies or something like that.

[16:00] The second piece is really I like to follow a lot of blogs. I have a blog. My goal is to be one of those blogs people like to follow for stock ideas. But I also sort and filter through ideas from other value investors. I like Focus Compounding. They’re a premium site but you don’t have to necessarily be a premium member to get some of the benefits. If you’re actually doing the research yourself. You can just follow their blog. Just check it once a week, see what stocks have been written up and you can do your own research about them. And so, you can build a list just looking at the past ideas that have been published there, even though you’re not going to have access to them. nonamestocks.com is a great resource to learn about dark companies. Elementaryvalue.com is a great resource to learn about companies that are not often talked about and are going to be likely to be very deep value very small companies. By small companies, I’m talking about less than like $50 million in market cap.

[16:57] So, the most companies you hear about in the market are billions of dollars, tens of billions, hundreds of billions. I mean Apple is trading at over a trillion dollars. Well, it might not be now. I haven’t looked at it recently. But like you have it here like Berkshire Hathaway, that’s a $500 billion company. Or Exxon Mobil, that’s 100-billion-dollar company. Most of these large major companies you’ve heard of, these is $100 billion company. Those companies are huge. If you look at smaller companies, less people are looking at them. If you look at dark companies… And what dark means is it’s a company that doesn’t report its financials directly to the SEC. So, the SEC is the Security and Exchange Commission in the United States. Companies of a certain size are required to report their financials to the SEC. Companies that are at a smaller size aren’t necessarily required. They can choose to deregister if they would like. And what that means is that most investors aren’t looking at those companies, you’re likely to find better values by looking at them.

Ney Torres:                       [17:58] Okay. And you’re putting all of this together into your webpage. Right? The DIYinvesting.org?

Trey Henninger:               [18:07] Yeah. I talked about in particular, certain companies that I find or that I’m interested in. I do analysis on companies. Basically, I have like three stages in my process. First stage is I’m evaluating the quality of the company. So, I really want to own high-quality companies. These are dependable companies, low competition, high moats. And so, the first part of my process is sorting every company I research by the quality. And so, I’ll write up a little quality report and publish it to my web page. Those are available only to premium members of my website.

[18:44] My website is open for everyone for all the strategy content, all the stuff on how to invest and that sort of thing. But a lot of my individual write ups I put behind a paywall to protect the research that I’m doing because I considered my research valuable and it’s the work I’m putting in for my own investments. Basically, those premium members who are $5 a month can get access to all my quality reports. So, that’s my first stage of my process. And that they can take that and then see which ones are high quality, and they can start their own process from there. The next stage is I do an intrinsic value analysis. For those companies that pass my quality filter, I’ll figure out what the value of the company is, value it, and then go in and invest from there. And then the final process, and those intrinsic value reports are premium members at $10 a month. And then beyond that, you can get access to my full portfolio and what I’m investing in for $25 a month where I talk about the specific stocks that I’m buying that pass each of those two filters, and also become one of my typically five favorite stocks.

[19:46] So, I like to own five companies at 20% of my portfolio each. Right now, I own 10 because there’s just a lot of value out there. And it’s been hard for me to find ones that I just want to focus on. But a typical normal position size for me is 20% of my portfolio.

Ney Torres:                       [20:04] Well, so you normally hold five stocks.

Trey Henninger:               [20:07] That’s my goal is to own five stocks at 20% each. And I think it’s really hard to do that. Historically, I think I’m going to probably be able to get back to that during this downturn because there’s probably going to be five companies that are low enough price, and a high enough quality because I want really high-quality companies at a really low price. And if you’re just buying large caps, that’s almost impossible to do. But during this market collapse, I might be able to find five companies that I’m highly confident are going to hit my return hurdle, and I can concentrate on them. I own right now like three stocks that are 20% of my portfolio each, so it’s 60% of my portfolio is my top three stocks. And then I have seven stocks filling the other 40% because it’s just… it’s been harder to find of those seven. They’re not exactly either a low enough price or high enough quality to make them a full 20%.

Ney Torres:                       [21:03] Can you give us examples of very cheap stocks that you’re seeing right now?

Trey Henninger:               [21:08] Yes. Well, I’ll talk about a large cap and then I’ll talk about to compare it. One of these dark stocks and we can talk about that. Well, I would assume most of you have heard of, would be like Exxon Mobil right now. It’s an oil company. So, it’s like, “Oh, man, I don’t want to own oil company.” Well, the interesting thing about Exxon Mobil is there are two companies. Have you heard of Dividend Aristocrats?

Ney Torres:                       [21:39] Yeah, like the must haves that always pay dividends, right?

Trey Henninger:               [21:44] Yeah. So, Dividend Aristocrat has 25 years or more of paying a dividend every year and that dividend increasing each year for all 25 years, so there are only two Dividend Aristocrats in the world… Maybe not in the world, but only two Dividend Aristocrats in the publicly traded space that have paid an annual increasing dividend that are also energy companies. Those energy companies are Chevron and Exxon.

[22:15] Exxon is my favorite because they’re a little more conservative typically. And they tend to have a higher growth rate over time. But what Exxon has done is they paid a dividend every year for the last 120 years. Since 1882, Exxon has paid a dividend every year. For the last 37 years, it’s been an increasing dividend every year. So, they’re dividend aristocrat. They raised their dividend every year and they have for 37 years and they’ve never not paid a dividend for an entire year since 1882.

Ney Torres:                       [22:46] Yeah. They’re currently the energy sector has been…

Trey Henninger:               [22:49] The energy sector is being slaughtered. Now, I mean, you look at it now you could say, “Oh, well, Exxon Mobil can’t make a lot of money at oil prices of what? $20 a barrel we have today or $25. By the time it’s released, who knows? Maybe we’ll be at $10 a barrel.” But this isn’t the only oil crash that’s ever happened. [Unclear 23:08] me trying to say, “Oh, well, this time is different. Everything’s different.” Well, sure. But they’ve been through this before. They’re the strongest biggest oil company in the world. They know how to manage their balance sheet during downturns. What happens during a downturn is that all the weak oil companies fail and go bankrupt and their assets are worth pennies on the dollar, and then Exxon buys them. And then they have a cheap source of land to produce more oil in the future. So, you have a company that I just said has raised its dividend every year for 37 years and has paid a dividend for over 100 straight years. Well, their current dividend yield is like 10 and a half percent.

[23:48] So, if my target return is 10%, and I have a company that not only doesn’t like stop paying dividends, but has been raising them for 37 straight years and this is like a core part of their identity, then, I mean, to me, that’s a buy. I mean Exxon has traded at a 10% or greater dividend yield three times in the 120 years. And one of those times is 2020. And the last time it was, was I think in the 1930s. So, I mean, you could say, “Well, this time could be different and they’re going to cut the dividend.” Sure, they might. But this is classic value investing. If it feels bad to have to buy this stock because everyone else says it’s bad. Well, sometimes they’re right. But sometimes they’re just under estimating the sheer power of this company. I mean they are down. I don’t know what it is. 60% this year, something like this. They were trading at $75 – $80 a share.

Ney Torres:                       [24:49] It got up to 82. And now we’re seeing it at 32. So, just under. Yeah, 60% down or something like that.

Trey Henninger:               [24:58] Yeah, so they’re 52-week high is at $3. Now $31 – $32. Okay. So, yeah. I mean I think Exxon is a great deal.

Ney Torres:                       [25:07] Just to simplify, it’s like somebody buys a property with management included. They don’t have to go to the bank and ask for a loan and paint the walls and anything like that. And they will get 10% dividend every year. That’s how you see it, right? That’s a comparable way to see it. And it’s different than a property is that this could go up. What’s good period PE ratio for this 13? It will go up back to 80 again.

Trey Henninger:               [25:43] Yeah. I mean if you want to think of it in terms of property, I mean, so it’d be like buying a fraction of a hotel or something or an apartment complex. You bought your one piece of the apartment or you bought two units, but the apartment is managed for you. You don’t pay any of the maintenance. Okay? So, you don’t pay any of the maintenance. You could think of this as you know, if it’s a public, you know, maybe a triple net lease or something. You pay none of the maintenance. You pay none of the taxes. You pay none of the expenses. All you do is get paid the cap rate.

[26:14] And then, that cap rate is 10 and a half percent. You don’t have to take on any debt. The management does all the work for you. Like you said, “Oh, and that dividend or that rent payment might go up 5% a year for the next 20 years.” That’s pretty attractive.

Ney Torres:                       [26:40] Yeah, for sure.

Trey Henninger:               [26:42] These opportunities don’t come around all that much. I mean I wrote an article in 2015 that talked about the oil majors, and I said they were on sale. And I think at that time, Exxon had a dividend yield of 4%. And I was like, “Man, they almost never have a dividend yield of 4%.” Well, just true. 4% is like a once in a decade thing for Exxon. Well, now we’re at 10%. So, to me, Exxon’s a good example of a large cap company that’s on sale that everyone’s heard of.

Ney Torres:                       [27:08] What do you think about that they have because they are normally known to be loaded with debt, especially the last decade?               

Trey Henninger:               [27:14] Well, they have to have debt. These are the company… But it’s just like real estate. I mean they operate on a multi decade timeframe. It takes decades to develop an oilfield. Now, Shell has changed some of that but this long deep-water stuff takes decades. And what it means is that there’s a long period of time where you have an inventory of expensive land, where you’re paying for it without getting any return. So, it requires debt. And because the returns on assets are relatively low, let’s say 8% to 10%. If you want to get a higher return on equity, you need to incorporate corporate debt. Just like if you’re going to have a real estate portfolio. Usually, you’re going to hold at least some debt on the portfolio because it increases your returns over time. So, that that’s how I think about it. Could they have too much debt? Maybe. I don’t spend that much time thinking about it for a company like Exxon, like I would for a much smaller company because they’ve proven historically that this management team knows what it’s doing. Or, maybe that’s a blind spot for me. But that’s what I think about it.

Ney Torres:                       [28:18] Just to add a little something there. It’s straight under tangible book, which means that if they close everything, you will still make more money, right?

Trey Henninger:               [28:29] Yeah. I have no idea when the last time was Exxon traded under book value. I mean its decades. It’s at least decades. I know it’s not happened since I’ve been alive. It’s probably been since the 1940s or 50s or something. But yeah, .73 book, which is just ridiculous. But I don’t know. I don’t care why other people are selling it to me. I’m just happy to buy it at these prices.

Ney Torres:                       [28:56] I’m just laughing when I see these things. Like, “Wow! It’s amazing.”

Trey Henninger:               [29:01] You want me to talk about a dark stock though?

Ney Torres:                       [29:03] Please do. Yes.

Trey Henninger:               [29:05] So, I think the best way to explain the dark stocks is to talk about it before revealing what the company is. So, I’m just going to describe the company. I want you to tell me what you think the company would be worth just off just like first guess.

Ney Torres:                       [29:18] Okay.

Trey Henninger:               [29:18] So, this is a manufacturing company. It manufactures industrial goods. It’s a high-quality company. This is a niche provider to its market. It’s one of the top providers in the world at what it does. It’s trusted, and it has a very secure gross margin on its products. It has pricing power. And what we’re going to talk about is the economics. You know, how much money are they earning per share?

[29:44] So in 2015, they earned 53 cents per share. In 2016, they earned $1.05 per share. In 2017, they earned $2.46 per share. In 2018, they earned $4.27 cents per share. A company that’s been doubling its earnings every year for the last three years, basically. I mean it goes from 2017 to 2018. It’s about 80% or something like that, or 85% instead of a full hundred percent. But that’s what you’re talking about. So, you’re trailing 12-month earnings as last reported, which would be the 2018 year was $4.27 cents per share. And it’s been growing basically at 100% kegger for three years. So, what do you think that company should be worth?

Ney Torres:                       [30:29] It’s just wow. It’s hard to tell. You take four and it keeps growing at… How much is it growing? Like 100% per year?

Trey Henninger:               [30:40] That’s what it has been and it’s kind of slowed down a little bit going into 20. It’s reasonable to assume it won’t continue at that rate.

Ney Torres:                       [30:46] Say, 20% just to guess?

Trey Henninger:               [30:51] Sure. Sure.

Ney Torres:                       [30:52] 20. 20. 25. We did this really fast.

Trey Henninger:               [30:59] Yeah. It’s always a little tough so forgive us.

Ney Torres:                       [31:04] Yeah, let me see. No, $40. Like $80, $100, or more.

Trey Henninger:               [31:13] Yeah. So, I mean $100 per share is what? Like 25 times earnings? $80 a share is 20 times earnings. I mean if you think about it. You have companies like Coca-Cola trading for 25 times earnings, and their revenue growth is like 1%. Okay. Well, maybe they’re down to 20 times earnings today because the stock market’s down. So, that’d be $80 a share. The last share transaction for this company was $18.75 per share.

[31:43] So, this is Northfield Precision Instruments Corporation and FPC. So, they last traded at basically a price to earnings ratio of four and a half.

Ney Torres:                       [31:55] What?

Trey Henninger:               [31:56] And they’ve been doubling their earnings over the last few years. So, this is an example of a dark stock. Now, why is it that low? It’s because people don’t know about it. People don’t do the research. Now, you could argue it’s also because I’m wrong and something bad is going to happen or they’re basically going to go bankrupt from Coronavirus or something. But they actually haven’t dropped any since Coronavirus. Since the beginning of the year, they’re up in price. So, you can take it for what you want. But I see companies like this and this is why I focus on dark stocks because we can talk all we want about big companies like Exxon which can be a great deal now. But now I’m buying company at four times earnings. That’s really attractive.

Ney Torres:                       [32:43] That’s like… Yeah.

Trey Henninger:               [31:46] It’s gangbusters.

Ney Torres:                       [32:47] That means it pays itself every four years, people. Just for everybody listening right now. Every four years.

Trey Henninger:               [32:55] If the earnings don’t grow.

Ney Torres:                       [32:56] If the earnings don’t grow, which don’t grow in 100% a year.

Trey Henninger:               [32:59] It’s like a cap rate of 25%. Now, they are paying a dividend. They’re not paying all of it out because they’re reinvesting that money, right? So, they’re putting in money to buy more capital goods to grow, to expand, which is what you want them to do if you’re getting that sort of return because you can’t grow that. You’re not growing your portfolio at 100% a year. So, you want companies that are growing to grow. But 2019 earnings aren’t out yet, so I don’t know what they are. That’s why I was using those 2018 earnings. They’re going to come out in June. But I look at this company, I’m like, “Okay. If it keeps growing, it’s worth way more than it is today.” And if it doesn’t keep growing, it’s still worth a decent amount. So, that’s I think why we said $4.27 is what it earned me in 2018. I would be highly surprised if it earned less than $5 in 2019. We’ll see.

[34:01] It helps to use an example like that, I think, for people to understand some of the differences between a dark stock and stocks that you hear about all the time. It’s very similar to real estate, which I think is why this it is a good example. In real estate, the way you get good deals is you go out in the world and you find good deals. And the same thing is true in stocks. Go out. You find good deals. You find stuff that other people aren’t looking at. You go to bankruptcy auctions. You go to all these tax lien auctions. You find good deals and you make it work because that’s how you find those little parts of the market that aren’t being discovered by the big investors. You don’t go and put all your money into a big major rite, like Simon Property Group. You go out and you do some legwork. Well, the same thing is true in dark stocks. So, that’s my comparison, I think

Ney Torres:                       [34:55] That was a great exercise, by the way. Yeah. Because that creates a point, I always try to explain to people. When somebody is obese, and they come through the door, you don’t need to know how much they weight to know they’re obese. It’s obvious. Same thing with buying stocks. If you have a spreadsheet, you’re probably not doing things right. But when it’s obvious like this, like I put a number like $100, and it comes out of 18. Well, it’s pretty obvious like, okay, this now what you have to do is to figure out, why are you seeing this and nobody else is doing it?

Trey Henninger:               [35:36] $100 is just it. I mean the whole point I asked you to do something on a quick basis. You gave us numbers. I mean you came up with 20 times earnings, which is totally reasonable for something growing fast. But like Amazon’s growing at 20% a year, right? And it’s valued at 80 times earnings, which would value this company at like you know $300, which is suitable for this company. But it’s just to show that the exercise works because the value is so different than what a normal person would come up with in a five-minute test.

Ney Torres:                       [36:11] It’s obvious and it hits you like a baseball bat on the back of your head. Like, boom! Oh, yeah.

Trey Henninger:               [36:18] Yeah. So, I mean if you’re finding these companies and it’s not hitting you over the head, then you’re probably not getting as good of a deal as you could. Because these companies exist out there. It does take time. This is not something I expect people to find when they’re first getting started. It’s more as encouragement that there are ideas. You can learn about them. And if you do the hard work of understanding what to look for, and where to go, and you know, like the types of websites that you would might want to read about, like my own, DIYinvesting.org, then you can learn these different avenues of maybe stuff that other people aren’t finding because that’s the only edge you have is an individual investor. You aren’t putting in as much time as some of these hedge funds. You don’t have a team of 30 people working for you. Or maybe you do and then great. Give me a call and maybe we can work out a deal to work together. But you know, you have to find where your advantage is. And for me, finding my advantage is where people aren’t looking.

Ney Torres:                       [37:23] Exactly. And with that I want to finish the show. It has been an excellent show. Thank you so much for your time, Trey. Again, go and find Trey at DIYinvesting.org. Thank you so much for your time, Trey.

Trey Henninger:               [37:39] Thank you. Glad to be here. Thanks for inviting me on.

Ney Torres:                       [37:42] It’s been a pleasure. See you next time.

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Financially Free Podcast with Ney Torres
Episode 11