TIP374: Mastermind Q3 2021 W/ Tobias Carlisle

Episode Summary

Executive Summary: In this episode of The Investors Podcast, host Dick Broderson and value investor Tobias Carlisle discuss investment opportunities in homebuilders, particularly PulteGroup, and the true state of inflation. Carlisle argues that homebuilders are undervalued due to underinvestment since the 2008 bust, with secular tailwinds from millennial demand. They debate CPI's accuracy, with Carlisle suggesting it understates inflation. Broderson then pitches Alibaba as a value play, noting its cheap valuation despite regulatory risks in China. The conversation covers macro factors, portfolio strategy, and the challenges of investing in Chinese tech stocks.

Main Topics: Homebuilder Investment Thesis (Priority: 5/5): Tobias Carlisle presents PulteGroup (PHM) as a value investment, citing underinvestment in housing since the 2008 bust, strong balance sheets, and demographic tailwinds from millennials. He highlights low valuation multiples and industry cyclicality. Inflation Debate and Measurement (Priority: 4/5): The hosts discuss the accuracy of CPI, with Carlisle arguing it understates true inflation due to hedonic adjustments and exclusions. They explore implications for interest rates, bond yields, and investment strategy. Alibaba as a Value Opportunity (Priority: 5/5): Dick Broderson pitches Alibaba (BABA) as a fallen knife, noting its cheap valuation (20x free cash flow) despite regulatory crackdowns in China. He analyzes its business segments, including cloud computing and e-commerce, and the risks of government intervention. Portfolio Strategy and Cash Management (Priority: 3/5): The speakers discuss opportunity cost of holding cash in a low-interest-rate environment, the importance of staying invested, and strategies like using momentum signals to avoid catching falling knives. Chinese Regulatory Environment (Priority: 4/5): Broderson explains the unpredictability of Chinese government actions against big tech, comparing speed and magnitude to US antitrust actions. He notes the impact on data collection advantages and market power.

Key Arguments: Homebuilders like PulteGroup are undervalued due to a decade of underinvestment post-2008, with housing starts still below long-run averages, creating a secular tailwind. CPI understates true inflation due to hedonic adjustments and exclusions of energy and housing; alternative indices like ShadowStats suggest higher rates. Alibaba is cheap at 20x free cash flow with 30%+ earnings growth, but regulatory risks from Chinese government create uncertainty; the risk-reward is favorable at current prices. Holding cash in a low-rate environment incurs significant opportunity cost; investors should stay invested in cheap cash flows rather than timing the market. Chinese tech stocks face more aggressive and arbitrary regulatory actions than US counterparts, but this risk is partially priced in, offering potential upside. Value investing strategies benefit from rising interest rates and inflation, as seen in recent outperformance of value vs. growth stocks.

Data Points: Housing starts (June 2021): 1,643,000 - Current level is below long-run average and far from 2007 peak of 2.7-2.8 million. PulteGroup market cap: $14 billion - As of the recording date. PulteGroup P/E ratio: 9 or below - Acquirers multiple around 7. US 10-year yield: 1.3% - Historically low, with real yield negative 4.1% given 5.4% CPI. Alibaba free cash flow multiple: 20x - Trading at $175, with 30% annual EPS growth over 3 years. Alibaba revenue growth (5-year average): 47% - Cloud segment grew 29% YoY (adjusted for ByteDance loss, ~50%). Alibaba cloud market share (global): 6% - Fourth largest globally, dominant in China with 3x Tencent Cloud. Alibaba active customers: 1.18 billion - Across all business units.

Pivotal Quotes: "The CPI is the consumer price index, is one measure of inflation, but it is not inflation itself." — Tobias Carlisle: Discussing the limitations of CPI and why it likely understates true inflation. "I think if you're an investor thinking about the next three decades, say, you probably should be looking at China." — Tobias Carlisle: On the long-term potential of Chinese companies like Alibaba despite current regulatory headwinds. "It's as cheap as it's been in the last five years. It's clearly the underlying business is spectacular because it's got massive returns on equity." — Tobias Carlisle: On Alibaba's valuation and business quality, acknowledging regulatory risks but seeing favorable odds.

Implications: Investors should consider homebuilders like PulteGroup for secular tailwinds from housing underinvestment. Alibaba offers a high-risk, high-reward value play if regulatory fears are overblown. Inflation is likely higher than CPI suggests, favoring value stocks and real assets over cash.