TIP518: The "Buy" List for 2023 w/ Eddy Elfenbein

Episode Summary

Executive Summary: Eddie Elfenbein reviews his 2022 buy list’s strong relative performance in a brutal market, explains the five changes for 2023, and details why his once-a-year, rule-based process continues to work. The discussion emphasizes disciplined holding periods, business quality over headlines, and finding undervalued, often boring companies with durable market positions, while also covering macro views on inflation, rates, and recession risk.

Main Topics: 2022 Buy List Performance in a Bear Market (Priority: 5/5): Eddie explains how the portfolio fell less than the S&P 500 in one of the worst market years in decades, reinforcing the value of sticking to the system during volatility. Rule-Based Annual Rebalancing and Human Bias (Priority: 5/5): The conversation centers on why changing holdings only once a year reduces panic, forces long-term thinking, and helps Eddie treat stocks like businesses rather than trades. 2023 Portfolio Changes and Stock Selection Rationale (Priority: 5/5): Eddie walks through why he removed or added names such as Church & Dwight, Reynolds Consumer Products, Middleby, Polaris, and others based on business fundamentals rather than price alone. Macro Backdrop: Inflation, Rates, and Market Rotation (Priority: 4/5): Eddie argues 2022 was a valuation reset driven by rising rates after the Fed’s pandemic-era risk backstop, which reversed the speculative growth boom and revived value/quality stocks. Surprising Winners and What They Reveal (Priority: 4/5): The episode highlights standout performers like Aflac, FICO, Hershey, SAIC, and Silgan, showing that steady, overlooked businesses can outperform dramatically. Eddie’s Research Process and Investment Philosophy (Priority: 4/5): He describes using annual reports, management conversations, competitor analysis, and trust in leadership to find durable, undervalued businesses, including small and micro-cap opportunities. Newsletter, ETF, and Long-Term Track Record (Priority: 3/5): Eddie discusses his Substack newsletters, the CWS ETF, its fulcrum fee structure, and the overall 17-year performance record of the buy list versus the S&P 500.

Key Arguments: Strict, once-a-year rebalancing helps avoid emotional decision-making and improves long-term discipline. The portfolio can outperform in difficult markets even if it lags in strong bull markets; relative downside protection matters. Business problems matter more than temporary stock price weakness when deciding whether to sell or hold. Macro changes after COVID and Fed stimulus distorted risk pricing; 2022 was a reversion toward normal valuation discipline. Boring, essential businesses can be excellent investments if they have strong market positions and reliable execution. A stock can remain undervalued even after a strong year if fundamentals and valuation still support upside. Turnaround candidates should be judged by whether their original thesis is intact, not by short-term price action alone. Small and underfollowed companies can be fertile hunting grounds for value when management is trustworthy and the moat is durable.

Data Points: 2022 buy list return: -10.42% - Reported annual performance of the list before dividend adjustment 2022 buy list return adjusted for dividends: -9.28% - Dividend-adjusted performance of the list in 2022 S&P 500 2022 return: -18.11% - Benchmark performance for the same year 2022 outperformance: ~9 percentage points - Buy list beat the S&P 500 by nearly 9% in a difficult market 17-year buy list performance: 435.73% - Cumulative historical performance of the buy list since 2006 17-year S&P 500 performance: 333.17% - Cumulative benchmark performance over the same period Long-term outperformance: ~102 percentage points - Difference between buy list and S&P 500 over 17 years Estimated annual outperformance: ~6% per year - Approximate annualized edge cited in the discussion Aflac 2022 return: 23.21% - Identified as one of the biggest and most surprising winners FICO 2022 return: 38%+ - One of the strongest performers on the list Hershey 2022 return: 19.69% - Strong year after multiple years on the list SAIC 2022 return: 32.71% - Defense/IT contractor performance Silgan 2022 return: 21.01% - Container business cited as an overlooked winner Trex 2022 return: -68% - Large loser, but retained for 2023 because issues were seen as cyclical/external Reynolds Consumer Products 2022 return: -4.52% - Removed from the 2023 list due to fundamental concerns and downward earnings revisions Polaris cash flow (2020): $805 million - Referenced as a high baseline before recent deterioration Polaris trailing 12-month cash flow: -$39 million - Used to illustrate the stock’s recent weakness and cyclicality Middleby stock move in 2020: ~$120 to ~$40, then to ~$200 - Described as a dramatic pandemic-era collapse and rebound Middleby operating growth: EBITDA growth 23.5% - Cited as evidence the business remained strong Miller Industries market cap: ~$320 million - Illustrated as a very small, off-the-radar company Miller Industries revenue: ~$900 million - Used to show the company’s scale relative to market cap Aflac revenue exposure to Japan: ~70% - Highlighted as a major source of earnings and a reason for the company’s moat Celanese deal size: $11 billion - Large acquisition/merger of a DuPont unit discussed as potentially transformative Celanese cash position: ~$9.5 billion - Balance sheet impact of the major transaction Wall Street 2023 earnings forecast cut: 4.4% - Largest quarterly cut since 2014, according to Eddie’s newsletter Fed expected hikes: 25 bps in February and 25 bps in March - Futures market expectation discussed in the macro segment Target range after expected hikes: 4.75% to 5% - Projected policy rate range if hikes occur as expected Inflation peak: 7.1% - Referenced as the year-over-year peak before declines Inflation trend: Down for 5 consecutive months - Used to support Eddie’s view that inflation was easing Unemployment rate: 3.5% - Described as the lowest peacetime unemployment rate in 75 years CWS ETF AUM: All-time high at the time of recording - Mentioned as a sign of ETF growth and survival in a crowded market CWS ETF price: ~$47 to $48 per share - Compared with its original ~$25 launch price CWS ETF launch price: $25 - Initial offering price in September 2016 CWS ETF first-year structure: Fulcrum fee - Fee rises if the fund beats the market and falls if it does not Morningstar rating: 5 stars - Latest rating cited for the buy list ETF Portfolio construction: 25 stocks, 5 replaced annually - Key structural feature of the strategy Average holding period: ~5 years - Implied by the turnover rule

Pivotal Quotes: "We sucked, just we sucked less than everybody else." — Eddie Elfenbein: Explaining why the ETF’s flat-to-down year was actually a success relative to the broader market "The rules of the buy list as if it's a hindrance. And in many ways, I see it as a benefit." — Eddie Elfenbein: Describing why the annual, rule-based approach protects against emotional trading "The most important question is: how well do they do whatever it is they do?" — Eddie Elfenbein: Explaining his philosophy that business quality matters more than trendy themes

Implications: Listeners should focus on business quality, valuation, and discipline over market noise. The episode suggests that boring, durable firms and patient holding periods can outperform through cycles, especially when macro conditions force a re-rating of risky assets.