Lou Basenese, founder and chief analyst at Disruptive Tech Research, is one of the best tech analysts I know. Today he reveals his strategy for finding under-the-radar companies… why he focuses on patent filings… and his take on earnings season [12:35].
Plus, Lou gives us a lot of great ideas for investing in some of the world’s biggest growth trends: 5G, Internet of Things, and immunotherapy.
And in my educational segment [52:33], I break down one of the biggest investment opportunities for years to come… marijuana.
Wall Street Unplugged | 666
One of my favorite tech analysts shares his best ideas
Announcer: 00:00:02 Wall Street Unplugged looks beyond the regular headlines heard on mainstream financial media to bring you unscripted interviews and breaking commentary direct from Wall Street right to you on Main Street.
Frank Curzio: 00:00:13 How’s it going out there? It’s April 24th. I’m Frank Curzio of the Wall Street Unplugged Podcast where I break down the headlines and tell you what’s really moving these markets. Man, I love earning season. It’s like the start of the NCAA tournament. So much going on. Companies reporting like crazy before, after the bell. They have … looks like … what these companies did. Where the stocks are going. It lists 30 or 40 every single day. The ones that are up, the ones that are down due to earnings. So much excitement.
Frank Curzio: 00:00:52 And for me, look, this is what I love to do. Listening to the commentary during the conference calls with those CEOs and CFOs going through every number over the past quarter. They also usually issue guidance unless you’re Boeing which is kind of amazing. The only company I know in the last five years that removed their guidance. They’re cutting production then they remove their guidance which means the cut in production wasn’t enough, right, so the numbers aren’t right. The stock is actually up. I don’t think I’ve ever seen that. I’ve never seen a company say, “Hey, we’re not going to offer guidance for the first time in a long time because we really don’t know what’s going on with our number one product and how much it’s going to be cut right now,” and the stock goes up. Interesting.
Frank Curzio: 00:01:35 I really love when a company like iRobot comes out reported bad numbers which is fine. Every company hits or misses every now and then. The stock has risen tremendously over the past few months, but it’s getting crushed today. It’s down 20%. And the CEO is on the call, all optimistic, right? These guys are usually optimistic no matter what. Even if their stock is down 13, 20%, it’s always optimism. It’s very rare when a CEO says, “Hey, you know we have to do a better job here,” which is kind of refreshing. No. “Everything is great we execute this quarter,” and the stock’s down 20%. “We executed, we said what we were going to do. Our guidance is a little light and the stock’s getting killed but just listening to them talk while just reality is really setting in for all the investors, it’s kind of funny.
Frank Curzio: 00:02:19 And digging into that call specifically, you have the CEO talking about tariffs. “Well, tariffs are hurting us and we’re going to raise prices to offset these tariffs.” I’m thinking why are tariffs hurting you? We’re at a truce right now between China and the U.S. Negotiation is going great. Most people believe there’s going to be a deal next month. Larry Kudlow just came out and said that. But you’re looking at tariffs where it’s supposed to be a potential 25% tariff and U.S. back and forth with China. But, the company they say they’re modeling for 10% when it comes to tariffs.
Frank Curzio: 00:02:58 And, again, when you take a step back and look at this it’s pretty crazy because they’re saying, “Hey, we’re modeling for 10% tariffs.” Again, they’re talking tariffs. Very few companies are talking tariffs right now during this earning season. They were talking about it two quarters ago. Now, negotiations are better. Everything’s pretty cool on the tariff front, right? But, they’re saying it’s going to cost them, modeling between $20-25 million on a 10% tariff. They’ve been saying this at iRobot for the last couple of quarters which is nothing. It’s a lot of money don’t get me wrong, but it’s nothing for a company that’s expected to generate 1.3 billion in sales this year.
Frank Curzio: 00:03:35 So, why are you ever talking tariffs? Not to mention, they’ve been saying this on the past few earnings calls, but tariffs should be a non-issue. It’s like Whirlpool complaining about tariffs. It’s like Harley Davidson complaining about tariffs. Guys, we just had the biggest tax cut in the history of the United States. Companies are reporting blockbuster earnings, record earnings. Yes, tariffs hurt a little bit, but you’re getting a massive, massive amount of money due to the amount of taxes that you’re saving because we cut taxes on a corporate level.
Frank Curzio: 00:04:07 When you look at them, I explained that in the auto industry. The amount of money auto companies are making due to tax cuts compared to even a 25% tariff is nothing. If the tariff was all alone and we didn’t have tax cuts, yeah, it’s going to hurt earnings. Maybe it hurts earnings by 3, 4%. But you’re getting a 10, 12, 15% boost some of these companies from earnings. From the tariffs where 2% is … well, from the tax cuts and 2% is from tariffs. When you put everything together, you break down steel, you break down autos, you break down all these industries, everything we import from China, it’s a non-factor. The fact that you’re mentioning it and even saying it’s going to cost us 20, 25 million which is basically nothing when you generate 1.3 billion makes me think there’s something else going on within your company.
Frank Curzio: 00:04:54 And this is a stock that went up tremendously. Talk about maybe the past few months from 80 to 130. Now, it’s trading at 100 down 20% after earnings. But, something else that I notice when you’re listening to this conference call. You look at iRobot, they launched a new Roomba vacuum called the i7, and they’re starting to push it out in numerous markets. It’s in the U.S. but it’s going to be available in several international markets. And, this product is the company’s primary growth drive of 2019. That’s not me talking that’s them talking. That’s their primary growth drive.
Frank Curzio: 00:05:29 So, management said, “With this specific product the demand was ahead of plan for this product. And also we increased prices on this product during the first quarter to offset tariffs.” Again, tariffs is kind of non-issue, should be. Now, this is interesting. So, you’re saying demand was ahead of plan. Yet, your revenue fell short of estimates for the quarter. Margins fell to 50% from 53% from last year’s quarter … from the last year’s comparable quarter. And, I have to tell you something. The Roomba vacuum, when I was at CES this year, even last year, but specifically this year, there were at least 10 companies that make the same product. I even posted some pictures on Twitter. @frankcurzio if you want to take a look and I reported this.
Frank Curzio: 00:06:14 You have 10 companies basically making the same product and these products were climbing walls and washing windows. I’m not kidding. I have videos of this. So, it’s like a Roomba that washes windows outside. You don’t need those big guys which I like, right, from New York City and you’re looking up there it’s like, oh, man. They’re just washing windows in 40, 50, 60-story buildings and stuff. You don’t need that anymore. This is amazing some of this stuff. It was just better technology than what I saw with iRobot. And, for a company that says, “Hey, this is going to be the basis for basically all of growth, our profits going forward 2019 probably beyond,” and you’re raising prices on a product that’s not really proprietary? There’s something more going on here.
Frank Curzio: 00:06:58 When I look at companies like that, when I look at Whirlpool, Harley Davidson, they could say all they want about tariffs. Nobody’s buying motorcycles and Whirlpool’s not getting it done. That’s what it comes down to. They were warning last year. Not everyone was warning, everyone was concerned about tariffs. They weren’t issuing crazy guidance, very conservative. But, man you should have made a fortune off of tax reforms. And you’re talking tariffs. There’s a reason why S&P 500 companies reported record profits. So, it is amazing to see what companies saying what they do.
Frank Curzio: 00:07:33 But, getting back to iRobot, and again the stock is down a lot today. I think people are seeing what I’m seeing. It just didn’t make sense. You’re raising prices on the product because you’re saying demand is great but revenues are lower than expected. I don’t get it. Not to mention are you really going to be able to raise prices and have that pricing power when there’s so many products just like this on the market especially in the international markets. When I look at this I see lower margins, weaker than expected revenue, yeah, I’m going to be interested to see where the company is trading over the next six to nine months.
Frank Curzio: 00:08:10 But, the most important part of this and the reason why I bring up iRobot, is because when it comes to technology and we all love technology. We’re all invested in technology. Technology being one of the hottest sectors since the credit crisis still continue to do amazing. All of the biggest companies of the world are Facebook, Google, Amazon, Microsoft. Basically the four biggest companies of the world are based on [inaudible 00:08:30] technology. When it comes to technology it’s all about patents. It’s intellectual property. Protecting your technology. Because if you don’t, there’s a few companies out there that I just mentioned like the Facebooks, Googles, Apples, Microsofts, that have hundreds of billions of dollar combined on their balance sheets. And, they ready to jump all over your great idea in seconds if you don’t lock up that technology. We’ve seen it with Facebook basically copying everything that Snap did, right, Snapchat invented. We’ve seen it with GoPro, Fitbit, Blackberry.
Frank Curzio: 00:09:07 I’m bringing this up because if you’re going to invest in any technology company especially small or mid-caps, you’d better understand its IP portfolio. Make sure they have patents on their signature products. Make sure they lock … not pending, not patent pending, patent pending. I love that. Patent pending means nothing. It means nothing. Big deal you filled out some paperwork. It’s like I have a loan pending for $25 million to buy a mansion in the middle of Florida. It’s pending. It’s pending. What does that mean? It means nothing. It means you don’t have a patent and you’re not going to have a patent. But, you want to lock up this technology.
Frank Curzio: 00:09:49 So, today I’m bringing on a great analyst. His name is Lou Basenese. He was the Founder of and Chief Analyst at Disruptive Tech Research. Good friend. He’s one of the smartest technology analysts I know and today he’s going to break down the importance of IP including how he combs through patent databases to find new ideas in a tech space. Going to break this down in layman terms. It’s not going to be difficult to understand. And, most important, Lou is going to share tons of ideas with you in this interview. Talking about large cap tech stocks, he likes that a lot of these names are reporting earnings pretty much this week and next week. He’s going to share at least three small cap tech names with you that I’m sure, almost positive most of you have never heard of because there’s two of them that I never heard of.
Frank Curzio: 00:10:38 It’s going to be a great interview. Lou is very smart, funny, really knows his stuff when it comes to technology. Definitely give it a listen. In my educational segment I’m going to talk about one of the most popular trends in the world today. A trend I always get tons of questions about, always, and that’s marijuana. I haven’t spoken much about this sector on the podcast. Every now and then I’ll take a couple of questions on Frankly Speaking which I host every Friday. But I will tell you I was one of the first in our industry to cover marijuana in 2013. Just before Colorado approved it for recreational use which is I think January 2014.
Frank Curzio: 00:11:19 Nobody cared back then. We even had a promotion go out when I was at Stansberry. Nobody cared. Nobody subscribed. Everybody’s like … they were still on the fence back then. We were definitely early and you fast forward to today, everybody loves the sector. Millions of stock promoters focusing on this sector telling you this is going to go 50X, 100X, all this crazy stuff. Huge in Canada and everybody’s going all in on this since Canada is a mining town especially Vancouver and the mining industry has been pretty much the worst industry in the world over the past seven year, six years.
Frank Curzio: 00:11:50 So, most of the CEOs are now investing in this industry and looking for other growth industries instead of just sitting there and getting murdered in gold, silver and whatever. But, in the education segment I’m going to break down the industry. Tell you what I like and dislike about it. Also, I’m going to share tons of ideas with you. Some good. Some you need to avoid. And I’m going to break down the M&A part of this because it’s crazy right now. There’s a lot of acquisitions taking place. A lot of M&A activity. And, I’m going to tell you which companies are going to benefit and which companies again that you definitely need to avoid in this sector and it’s something that we’re going to be covering going forward at Curzio Research.
Frank Curzio: 00:12:28 Before I get to marijuana and that trend fun stuff, let’s get to my interview with the one and only, Lou Basenese. Lou Basenese, thanks so much for coming back on the podcast.
Lou Basenese: 00:12:38 Thanks for having me, Frank.
Frank Curzio: 00:12:40 It’s been a long time. Too long and I’m going to set the bar really high for you, buddy. I don’t know if that’s good or bad because you’re a tech guy but I’m just going to set the bar right off at the beginning. Because I really consider you one of the best tech analysts in the industry. You’re a person I turn to spot new trends in technology as well as new ideas and reading your stuff. The reason why is you’ve come up with a formula and, again, everyone has their own formulas of research and this is just one aspect of it, but I love talking about this because it makes so much sense. I think you’re one of the few people to do this. That’s something you say is patents proceed profits. Why don’t we start with there and tell everybody what that means.
Lou Basenese: 00:13:18 Look, I think the favorite mantra on Wall Street is that stock prices always follow earnings, right? If you look up the historical correlation between earnings per share for the S&P 500 and the price performance for the S&P 500, it’s a tight correlation. It’s absolutely true. Pick any company that keeps reporting profit growth quarter over quarter and the stock’s going to be going higher. But, I think in today’s world you have to deconstruct that. We’re always looking for early indicators, right? So, how do we get ahead of earnings?
Lou Basenese: 00:13:45 Well, before you have earnings you have to have sales. And before you have sales, you have to have a product. And in today’s technology-based economy, I’d argue before you ever have a product, you’d better have patents or you’re going to get ripped off ad nauseam. We see that happening right now with between Snapchat and Facebook. Anything Snapchat does Facebook does better and at a broader scale and immediately immunizes any benefits to Snapchat. Or, another classic example if Groupon. They invented the daily deal space but they had absolutely no patents and when they came to market within 18 months they had over 350 competitors and now they’re hanging on by a thread.
Lou Basenese: 00:14:22 I think the mantra that stock prices ultimately follow earnings, I’d argue that even earlier they’re ultimately going to file patents. And, as long as they’re high quality patents, that’s going to give us an early heads up on the next biggest trends and sales drivers for all these major companies.
Frank Curzio: 00:14:38 Now, how do you see these trends unfold in the patent side. Is it say, Apple will file for wireless charging which I think they’re not into anymore, right? I think so. I think they’re really not focusing on that industry. But, if you focus on what if it’s 5G is it all of a sudden you’re seeing a lot of companies have it because I know that you have the Apples, the Facebooks, the Googles, they’re all checking this stuff, right? I’m sure they’re checking this stuff as well. But, how do you spot it where you’re able to say, “Wow, a lot of these guys are filing patents in one particular trend or industry,” how does the whole process happen? Does it all come at the same time? Months apart? Six months apart?
Lou Basenese: 00:15:13 Yeah, no I think it’s a great question and a great clarification. I’m not just looking for any patent. Anyone with a little bit of money can file for a patent and get an application and that doesn’t necessarily mean it’s a valuable technology. I’m looking for clusters of patents. You bring up the 5G example. The key technology to 5G the way that all works is radiofrequency filters. So, I’m looking for what’s been going on in the patent filing space for that type of technology? What we’ve seen in the last three years is this explosion in patent filings around radiofrequency filters that can handle these higher bandwidths that are required for 5G.
Lou Basenese: 00:15:48 What I want to see from a top down 30,000-foot view is that not just one company. Not just the Verizon’s of the world or AT&T, but the entire industry is starting to ramp up their patenting around these technologies because that indicates that there’s some serious interest there. You brought up Apple and wireless charging. Apple’s had wireless charging patents that go back probably at least three, four years ago. Samsung also a big filer there. But, you’re seeing those products now come to market, right, in the last couple of years. They patented in advance of any wireless charging capabilities coming to market and then you saw them role it out in the phone. It’s really what’s the trend in the patent filings before we get into the actual product releases.
Frank Curzio: 00:16:33 Now, the way the market works in technology now, in mining it’s different. Even in biotech it’s different where you see these early-stage companies come to market. They’ll IPO. They don’t have revenues and earnings especially in biotech. But, you have the opportunity to get into these things early on and they’re risky of course.
Lou Basenese: 00:16:51 Right.
Frank Curzio: 00:16:51 Now, with technology you’re seeing all these IPOs, all the unicorns come out like crazy where they’re coming out multi-billion-dollar valuations. How do you spot a trend in 5G that allows you to buy other companies? You could say, well here’s Qualcomm, here’s Verizon, here’s AT&T filing these. But, how does it filter down to maybe if you find like a hidden gem in the industry. Could you still find that or is just, hey, these companies are going to stay private and either get bought or they’re going to come out and wait and have several rounds of funding where they’re going to come out multi-billion-dollar valuations. I feel bad for individual investors because you can’t really participate in all that growth. Most of it’s already gone by the time they IPO.
Lou Basenese: 00:17:26 Right, yeah, a lot to unpack there. I would tell you the big tech unicorns coming public now short the living daylights out them. Most of them are so overvalued. But, you bring up the better question. Is there a way for us as individual investors to find these hidden gems that are coming to market at attractive valuations and I’d argue absolutely. So, if we look it’s a top down bottom up approach. Top down we’re trying to figure out what’s Apple, Qualcomm, Verizon, AT&T doing and then we’re going bottom up to say, “Who’s a small publicly traded innovator that also is filing patents in this space?”
Lou Basenese: 00:17:58 If you look, I think some of the big trends this year to be keeping an eye on based on patent filings or 5G networks, there’s a company there called Resident that has basically patented a new design architecture. So, what the entire industry has done to design these RF filters that allow the phones to tune in to the right frequency bands, they’ve designed been able to do it in a software-base model. Whereas, traditionally the entire industry it’s been a trial and error iteration. Design a part. Test it. Tweak it. Go back and redesign it and have the hardware produced and back and forth trial and error. So, they’ve done it software based and the patents have indicated that they have those capabilities.
Lou Basenese: 00:18:37 Another big trend that I’m looking at is immunotherapies. When you see Kite and Juno got bought out at roughly $10 billion valuations, it’s the biggest buzz in biotech right now. I’m looking for small publicly traded companies that are doing something different in immunotherapies. There’s a company there called Cue Biopharma that has the ability to be very targeted in their approach with immunotherapies. They can actually use it for autoimmune which is basically down regulation and up regulating. They have selectivity.
Lou Basenese: 00:19:05 Those are unique qualities that the patents reveal that they have that big players in the space don’t have. And the good news is they came public and both those companies are trading around under $200 million market cap so they’re not grossly overvalued like we see with some of these other IPOs.
Frank Curzio: 00:19:24 And those are some good examples. I appreciate you sharing some ideas. Now, you talked about immunotherapy. It’s a trend that I’ve been familiar with for at least the past three, four, five years. Something … it’s nice, right, to really … Our job is to find stocks that people are going to make money on, but it’s also nice when you could invest in products that save lives, right? It’s amazing where this technology as gone with cancer because there’s been no real cancer treatments up to immunotherapy for pretty much the same cancer treatments for 100 years. Radiation. Chemo. So, what are some of the other areas because I know they have T-cells. You have gene editing. I don’t know if that’s not really going to fall into immunotherapy, but that’s also something CRISPR and things like that. Are you seeing patents within those industries as well?
Lou Basenese: 00:20:06 Yeah. Gene therapy is a big space now that’s coming up. I would say there’s great increase in patents there. I think that means probably going into 2020, you’ll see a lot more opportunities in the drug companies there. I think that’s one to keep on the radar. The immunotherapies is really just at the prime inflection point because you’ve seen the first drugs get approved, right? That validates the entire space. You get a few drugs approved and out there and then from Kite getting acquired by Celgene, those things happen and that gives validation to the rest of the space. I think the last count there’s some ridiculous number like 1500 different immunotherapy molecules that are in some various stage of clinical development at this point in time.
Lou Basenese: 00:20:51 So, very crowded space and then how do you find out the winner, the needle in the haystack in that situation? I think you have to find a company that has a technology that’s differentiated so it’s not just in biotech it applies across any other industry. Here with Cue Biopharma, they most CAR T therapies have a broad-based response. They’re going to activate the entire T-cell repertoire even the ones that aren’t specific to the disease which has all these knock-on effects whereas Cue has the ability to be very targeted and not have the rest of the T-cells that aren’t related to that cancer respond and cause toxicity.
Lou Basenese: 00:21:28 Again, I think that the key takeaway is maybe not from the individual example, but from using patent filing activity to guide investments is you have to find patents that are differentiated from what everyone else is doing.
Frank Curzio: 00:21:40 All right, let’s stick with the process here because, guys, we’re going to get into lots of ideas and a lot of big tech companies are reporting earnings over the next couple of weeks. We’re going to talk about that in a minute. But, take me through your process which is something I love to learn about where, okay, the patents is kind of like the starting point. Let’s take 5G. We talked about immunotherapies just now.
Frank Curzio: 00:21:57 Let’s get back to 5G where now you have the … you find an idea. Now, it’s like, okay, here’s 5G. Here’s patents that are being filed and you said it was radiofrequency filters and things like that. But, when you look at 5G the trend you have the cell phone towers that need to be build first. Then you have Spectrum maybe that’s even first. You have the infrastructure built from Verizon and maybe AT&T and then finally you’ll have the Apples and Samsungs who manufacture these phones, put these 5G parts in their phones and here we are with the trend.
Frank Curzio: 00:22:28 My question to you is after you find out the radiofrequency filters is one part of 5G. How do you find the best company in that space? Is it just, hey, this is original but then you have to look at valuation and you have to go almost like you start at tops down but now it’s kind of like bottoms up when you’re picking individual stocks.
Lou Basenese: 00:22:44 Yeah, no it is and it’s totally fundamental based. I think you’ve dissected the market perfectly. It’s you got the infrastructure side so this is the towers and the base bands that are going to be able to send out the network signals. And then you’ve got the handset side. The Apples and Samsungs of the world putting the parts into their phones. It’s a very bottom up fundamental approach at that point. If you look at the RF space and the 5G space, if you want to play it in a small cap way publicly traded compelling valuation, the best way I think to play it from the infrastructure side is a company called Inseego, INSG.
Lou Basenese: 00:23:18 And then I mentioned Resident, that’s the best way to play it from the handset side. It’s really there’s some elbow grease that has to go into finding these opportunities. I know that’s part of your process too. There’s a lot of guys out there doing internet-only research. There’s very few that are actually getting their hands dirty pounding the pavement, digging in and finding the real fundamental values and that’s what’s required though to find these multi baggers that have the potential that you find them in advance of everyone else and you reap the rewards for that.
Frank Curzio: 00:23:49 Yeah. Guys, listen, I’ve been right on trends and wrong on stocks … which is very frustrating. That happens to a lot of us but that’s why it’s more than just finding, “Hey, 5G is going to work out.” Yeah, it’s going to work out for the companies that have the best technology which you’re able to find out but also through fundamentals and digging down and talk to these management teams. That’s going to bring me to one last trend because we talked about immunotherapies and 5G, but you said a trend that you like right now is IoT. I was actually at the CES in 2013 when John Chambers said tens of billions of devices are going to be connected. He said everything would be worth more than 14 trillion in profits for the global economy. I think it was something like that. I thought he was crazy when I heard it. Now, the guy was dead on. By the way John Chambers is the ex-CEO of … former CEO of Cisco.
Lou Basenese: 00:24:37 Cisco, yeah.
Frank Curzio: 00:24:37 And now he owns actually his own fund called JC2 Ventures which invests in IoT startups. But, what has you so excited about this industry which people have been talking about for a while but there’s so many different aspects to where smart cities is becoming huge. More devices are getting connected. And then you have 5G which is going to provide a faster speed. This is like an ongoing trend. Are you still finding more ideas to recommend?
Lou Basenese: 00:24:58 Yeah, still finding ideas. I think it bring up this whole thing. There’s a lot of people that talk about compelling trends, but a lot of times they forget to think about timing and when it’s investible. 5G has been a compelling trend for years but it’s now finally investible because you have the Verizons of the world actually rolling out 5G networks. So, with IoT, when Chambers was spouting off these huge numbers that just seemed mind blowing to everyone in 2013, yes, it’s a super compelling trend but I don’t believe it was investible until recent years.
Lou Basenese: 00:25:27 IoT I think gets … I really think of it as the internet of chips. Forget the internet of things because what really the internet of things is, is taking chips, some form of sensor and putting it everywhere you can imagine. In the home. In pavements. In smart cities to alert the parking spots that are open. The possibilities are endless but it really if you boil it down to what’s the enabling technology, it’s semiconductors and sensors that are going into the world to collect data and then make decision based upon that data and then carry those out in the real world again.
Lou Basenese: 00:26:01 I think we’re finally there in terms of the miniaturization of the chip. They’re actually called Moates. There’s these little tiny chips that are just infinitesimally small that can fit on your fingertip. We’re finally at that miniaturization size and then also just the cost is so competitive now that you can put sensors in things very cheaply which is now enabling the internet of things to happen. And then the last component of that why I’m so excited is 5G networks.
Lou Basenese: 00:26:29 If we’re going to have tons of sensors out there collecting data and communicating back and forth, you got to have the networks to handle that data. I think it’s really a convergence of two trends in one that makes me so excited about the internet of things is because you finally can have the data bandwidth that you need for these applications that have been dreamed about and talked about for like you said, since 2013, over five years for them really to come to fruition right now.
Frank Curzio: 00:26:53 I love when you talk about internet of chips. I like that it’s like a new segment of IoT like you said, and you talk about sensors. So, when I see sensors I look at Cypress, Avago, Skyworks. But, how is your research … because when it comes down to your research and you’re looking at individual companies, a lot of these chip companies also have access and big exposure to Apple and Samsung where we’re seeing pretty much a secular decline of phones. I think everyone who has a phone is going to own it and again, this replacement cycles.
Frank Curzio: 00:27:19 But, does that go down to the fundamental research and say, “Okay, here’s the companies that just focus on the growth markets where if it’s electronic vehicles, if it’s autonomous vehicles, internet of things, but do you also look for ones that maybe don’t have too much exposure to the Apples and Samsungs right now?
Lou Basenese: 00:27:34 Yeah. I think two different types of opportunities. You find the ones that are insulated from single customer risk like Apple. Try and find them that are focused on a singular market that’s going to be big in IoT. The other way I’ve been going about it is looking for companies that are involved in the design of chips. They have a software tool that allows chips across all sectors to be designed. Or, maybe you look at a company like a TSMC which is fabricating all the chips. Forget about which chips in trying to pick the best chip, not is it going to be Nvidia’s chip or is it going to be Apple’s chip or Tesla’s new autonomous driving chip. Forget about that. Let’s go to the manufacturer of those chips because then it’s just a volume game.
Lou Basenese: 00:28:13 But, yeah, there’s one company in particular that I’ve been following for three years that I think is finally ready for prime time. It’s a company called Atomera. The ticker’s ATOM. They basically have a way to make chips better and more efficiently that could be rolled out across the whole industry. It’s not a matter of single customer risk. It would be a new just kind of like a gallium arsenide is a new material that’s used in a lot of chips. This would be a new process that gets used in the chip manufacturing process that everyone could use. So, it’s an enabling technology. It’s software and patent based. That’s another example.
Lou Basenese: 00:28:51 Otherwise, yeah, like you said, you try and find a niche player that’s providing a very specific type of chip. If you remember a couple of years back, the chips that were used for the cameras in drones. I think it was Ambarella. That’s a great example of, hey, let’s find a small player that’s doing something really big for a big growth segment of a bigger market.
Frank Curzio: 00:29:12 Yeah, no, it definitely makes sense. Once again, we’re talking to Lou Basenese, Founder and Chief Analyst at Disruptive Tech Research. Lou, let me give you time here because I want … I love your website. But, why don’t you tell what your company’s about for people who listen to you first time because we’ve known each other for a long time. But, I wanted … the stage is yours. Let us know what you’re doing now these days.
Lou Basenese: 00:29:31 Yeah, look, I focus on trying to find tomorrow’s next big tech trends and the best ways to invest in that. I think the thing that makes me different than most except you is that I’m investing my own money. I eat my own cooking so I’m going out trying to find the best ideas, the best investments for my own investment capital as well as for readers. I focus largely with institutional clients for the last several years and have now started expanding out the research to cover more tech trends and more ideas more regularly.
Lou Basenese: 00:29:59 Some of that information is completely available at the website that you mentioned. It’s disruptivetr.com. So, disruptivetr.com. If anyone wanted a free sample report, you can go visit there. There’s a signup or you can text the word disrupt to 66866 and we’ll send you a free report. We do not do any third-party marketing so it’s just pure sample report and you can check it out there.
Frank Curzio: 00:30:24 I love the text, man. You’ve become high tech now. I love that. First person to give a text. That’s awesome. I love it on a podcast.
Frank Curzio: 00:30:34 So, okay, let’s get into some of the biggest companies that are going to report earnings. Let’s start with Facebook and Google. We all know what’s going on. We see privacy issues are a very big deal. But, how big of a deal is it in terms of from an investor standpoint where you look at the stock price, the valuations. At the end of the day these guys are always going to have pricing power like the tobacco companies, right, when they can continue to raise prices because they get a better response on advertising than almost any other media outlet because they follow their customers, they know … It’s our fault. We say, “Hey, I like this. I’m here. I’m checking in on Facebook and stuff and post on Twitter all the time and everybody knows our lives.”
Frank Curzio: 00:31:10 But, what about these two companies? People are concerned that regulation could derail these companies. Are you concerned with that or do you just see these companies dealing with it? It’s ahead of them. They see a problem and are these things biased here?
Lou Basenese: 00:31:22 I think regulation is inevitable. There’s been too many sins and violations of privacy where they can’t avoid it. It’s going to take a long time, D.C. never moves fast. But, I think you used the perfect analogy comparing these social media companies and Facebook to big tobacco. Because the reality is we’re addicted to it, right? That’s not just the users it’s the advertisers. Where else can an advertiser go and get an audience over 1.2 billion people at one stop? They can’t.
Lou Basenese: 00:31:50 So, I think like it or not we’re wed to these social networks like Facebook as consumers as well as the advertisers. I do think tough there’s an existential threat to Facebook because they’ve been so cavalier with privacy and how they’ve exploited user data, that at some point there could be one additional revelation that could cause investors to bail on that. Now, I don’t think that’s very likely in the near term here, but I would be cautious in buying Facebook here. I’d look for a pullback. I think we have to have a meaningful pullback before it gets seriously interesting.
Lou Basenese: 00:32:28 They’re going to be spending a lot more that started a quarter or two ago on just a lot more moderators over content to avoid the catastrophes of seeing murders streamed on Facebook live. There’s a lot more expense going into Facebook maintaining its dominance. But, I think in the long term if you’re a long term buy and hold investor, you’re going to do well in the Facebooks of the world. You’ve got to pick the best [of breed 00:32:53]. I don’t think Snapchat is a compelling investment. I think it needs to go ahead and disappear already just like the original feature of its product. I don’t think it’s going to last.
Lou Basenese: 00:33:03 Twitter, they reported earnings this morning much stronger than expected. I think what’s an interesting story there with Twitter is the fact that Dorsey has realized they’re not going to be the next Facebook. They’re not going to get this massive audience so that he’s got to figure out the best way to monetize that audience. They’ve been the most proactive in terms of privacy and getting rid of just trolling. Again, there’s a lot of work to do but they’re being very aggressive about it and I think that’s showing up in the results. If I looked at the landscape of things, it’s Facebook and then maybe Twitter at the right valuations.
Frank Curzio: 00:33:39 Yeah, it’s interesting, right, because Twitter it’s not got hit because they weren’t adding anymore new subscribers. That was basically the biggest trend. You could identify with this where even across different industries. There’s same store sales for retails. That’s the number. Same store sales. That’s what people care about. It’s not so much earnings. Again, it’s all filtered but at the end of the day there’s certain things sometimes it’s margins. But, for social media companies, it’s, “We want to see user growth,” and Twitter hasn’t really been growing their file, but, they’ve been able to monetize I think better than almost anyone in the space in terms of percentage of subscribers that they have.
Frank Curzio: 00:34:16 Is that going to be the trend going forward because Facebook already has everyone on Facebook. It’s a 2.6 … I don’t know how many more people. Again, they could all have five, 10 accounts each, but is it going to come to the point where hey, it’s going to be about profits now? And same with Snapchat where if you’re not growing that user base that’s when it got crushed and again, they’re much smaller than everybody else. But, I wonder if that’s the new trend in social media where it’s not just, hey, we need to build … Doesn’t matter how much money you generate. Doesn’t matter revenue as long as you keep building that base. But, now that I see Twitter go up like this I wonder if there’s just a shift in saying, “Hey, we’re really going to be focusing on profits now.”
Lou Basenese: 00:34:49 Yeah, look I think it’s akin to the S-curve of innovation that happens in technology. You get to a certain point where bigger networks doesn’t equal bigger profits just because you can’t get a bigger network, right? You can just drive the bottom line by just expanding the network and now you’re seeing that transition. These companies are over a decade old. They’re much more mature businesses and there’s a pivot happening. Twitter’s pivoted to maximizing or optimizing the revenue per user and I think that’s what’s going to drive these share prices in the future. It has to.
Lou Basenese: 00:35:19 There’s not enough … the birth rate’s not advancing fast enough for these companies to have more people to go after to get onto the networks. They really have to focus on driving more value from a steady state user base which is what I think you’re seeing with Twitter here. I think it topped out really at about 330 million active users. That’s probably what it’s going to look like give or take a couple of million quarter over quarter. So, now they’ve got to realize, “If we’re going to stay in business, we’ve got to figure out how to make the most money out of these active users.”
Frank Curzio: 00:35:47 Now, Lou, what I love about you as an analyst is, we just talked about your methodology, looking at patents and it’s almost like bottoms up from there where you’re looking at different companies individually in fundamentals. But, one thing I love about you and I think everybody should pay close attention to this is the common sense point of it. Because you’re out there, you test a lot of these products. You watch TV all the time. You’re involved in these trends which is important. If you want to know if the economy is doing good, look outside your house. Look at houses for sale. You go to the supermarket, is milk higher? Is gasoline higher? You have access to this.
Frank Curzio: 00:36:19 I wanted to ask you about streaming because when I look at streaming and Netflix and I see Disney enter the market and Netflix has come back a little bit since then, but it got hit pretty hard. I look at Disney spending a billion dollars on content. Most of their content even Marvel, people aren’t really going to go … they go to movies to see those, right, all these. So, I don’t know if Disney … Should Netflix really be getting hit on Disney’s entry into this when they’re spending $7-8 billion, at least that’s what they did last year, on new content compared to Disney which is just spending a billion? Is that really going to impact Netflix which to me has some of the best original content in the streaming industry?
Lou Basenese: 00:36:54 No, I don’t think it is. Look, I think Netflix is best in class and they’re destined to stay best in class because they’ve made the investments I think from a … they’re eventually going to abut into the same problem Facebook has. How many more new users can we add? But, look, common sense approach here, what the numbers say is that we all pay for more than one streaming service. We’re willing to. So, a new entrant into the market it’s not like a Netflix versus Blockbuster when the original days of DVT shipment started, right? It was one or the other.
Lou Basenese: 00:38:08 If you increase prices enough you can spend some … and people don’t balk. You can spend more money on content which brings more people there and then you can slowly start increasing prices again so as long as they have this positive virtuous feedback loop going, I don’t think anyone’s going to be able to dethrone Netflix.
Frank Curzio: 00:38:24 Now, here’s the big question for you and it’s going to be an easy one for you.
Lou Basenese: 00:38:28 I don’t believe you. I’m skeptical.
Frank Curzio: 00:38:30 No, so I attend the Consumer Electronics Show every year and I love doing it because I have a whole system. I have great contacts there. I’ve been doing it I think for about eight years now. And, I always find new ideas. I’m always able to build my network and it’s a lot of fun. But, the disappointing thing especially the last two years is the lack of innovation. I’m talking about innovation where what’s the next big trend where even today what did we talk about? 5G. IoT. Smart cities. We can even go into big data analytics, AI. I shouldn’t really say innovation because innovation within those trends but is there anything that you see even from the patent side, again, this is a really tough question, that you’re saying, “Hey, this could develop into a big trend?” Because the last two years I haven’t seen like the whole other than maybe smart assistants with Alexa and Google Home and stuff like that. I really haven’t seen anything I’m like, “Wow, this actually makes a lot of sense.”
Lou Basenese: 00:39:22 Yeah, look, I think CES is losing its usefulness. I used to go regularly and I met the same thing that you did. It’s like you start getting to a point where you’re not seeing any new breakout innovations and I don’t think that’s because we’re struggling as a world global economy or a U.S. economy to innovate. I think these innovations are just different. They’re not necessarily consumer facing. You talk about voice, personal assistants, artificial intelligence is really big, but how do you display that? How do you boil that down to a consumer product really early on to get people excited about it? I think that’s the disconnect. A lot of innovation is going on in the software side of the world, the chip side of the world that hasn’t expressed itself on a consumer product yet so you’re not seeing it at the CES show.
Lou Basenese: 00:40:10 I think about artificial intelligence everyone is so jazzed up it but what is it really? Is it a product or is it more an enabling technology like the internet was? I’d argue it’s more like the internet. Everyone had to move their business online when the internet came out. Whether you were an internet-related business or not, you had to have a web presence. I think the same thing’s going to be true of artificial intelligence. It’s going to be like the BASF of technology. It’s not a product itself but it makes all the products better. It makes Facebook better doing what it does. It makes logistics companies better at what they do because they have AI inside.
Lou Basenese: 00:40:47 From the standpoint of am I seeing big trends emerging that might not be showing themselves at CES, I think you put your finger on one and that’s voice. We’ve gotten to the point where computers can recognize over 95% of speech which is a critical threshold and we’re going to start seeing voice incorporated more and more into technology. It’s going to become the new interface just like touch screens replaced actually pushing buttons on a phone or an electronic device. I think voice is going to be that next interface.
Frank Curzio: 00:41:17 Yeah, it makes sense. That was a big theme too at his year’s Consumer Electronic which actually has over 4000 companies now. There could probably be 600. They shouldn’t be 4000. It’s really crazy… that’s why when you go there and you know where to go and who to talk to, it’s a big difference. If you go there for the first time, you’re going to be totally overwhelmed. There’s a million things going on. Anyway, but, one of the things with voice is they had the translators where they had something that you could wear around your neck in any language. They speak into it and it’ll translate into your language or whatever which I thought was … like on the spot, immediately. This technology has been available for the last couple of years but now I’ve seen … now you’ve seen 20, 30, 40 different companies display it compared to one, two, or three which I thought was interesting.
Lou Basenese: 00:41:55 Right.
Frank Curzio: 00:41:57 You bring up a good point where AI’s not a consumer product so it’s kind of like … and, where big data is not really a consumer product where we could all use and buy like a GoPro or something like that. And it is interesting how everyone’s incorporating that technology. I guess that leads me to the next question. Is it worth playing these … I like IBM because I love the transition, I think it’s dirt cheap. They still have to outperform and I love the Red Hat acquisition, right? Maybe they do maybe they don’t. Maybe they don’t execute.
Frank Curzio: 00:42:25 But, is it worth going into some of these big companies that are focused on the AIs or the big data analytics and cloud computing or the Amazons and stuff like that? Or, do you say, “Hey, you know what, I know that much in this space in technology. I’ve been covering it for so long that I know how to filter it down and find even better ideas in large caps.”
Lou Basenese: 00:42:43 No, look, I think you have to do both. You do small cap and the large caps well. I think the large caps provide you almost de facto ETFs on these new leading tech trends. Think about Amazon. Where is Amazon not reaching into? They’re now getting into the health care market. If you want an ETF that is tech based that can get into all these new growth markets, Amazon’s a great opportunity. At some point I’d argue Google was the same way with all the Google moonshot businesses. For trends that are still emerging, I think you’ve got the right approach trying to find companies that are undervalued. An IBM, very low valuation so the risk is low but they’ve given themselves an opportunity to expand into new growth markets so that’s a good example.
Lou Basenese: 00:43:27 I would look at … if you’re looking to play augmented or virtual reality, I’d argue Apple was probably the safest bet there, right? This is a company that’s never first to market with a solution, but a second or third and then dominates it. Apple, no one’s ever going to argue that Apple is super expensive. It’s a lower risk way to play AR/VR which is coming to market in 2010 I think is the rumor for the first launch of Apple’s augmented reality hardware.
Lou Basenese: 00:43:54 I think getting back to the original question, I think you have to do both. You have to look, follow the patents to these small up and coming innovative players. But, then also focus on the large cap names that get beat up unjustifiably that have leverage to these big growth trends because then it’s a very asymmetric return for you. It’s low risk. Potential for really high reward. If you augment that with some leap options, long dated call options, I think it’s a tremendous strategy to boost your returns over time without taking a ton of risk.
Frank Curzio: 00:44:26 Let’s speak about that because we’ve been in a tremendous boom. You’re definitely in the right space because I have friends in the mining space and I kind of feel bad for them, right?
Lou Basenese: 00:44:34 They’re pivoting to cannabis now some of the miner-
Frank Curzio: 00:44:37 Exactly. Sometimes you cover one industry and it’s … I can put technology’s been great. I guess on the macro side I’m curious to know what you think where we’ve seen the trend play out almost the last seven, eight years where almost every pullback is met with a buying opportunity. Not talking about every single stock. Some stocks are not there in whatever, you have the GoPros and the Fitbits and stuff like that. But, for the most part a lot of these large caps even the Intels and Ciscos are hitting new highs. Do you think that trend’s going to continue? Do you think there’s going to be separation because it seems like a lot of these large cap companies are all doing well.
Frank Curzio: 00:45:10 The market is trading close to 52-week highs, but technology is significantly outperformed especially over the past few years. Do you see this continuing because that’s going to allow you to take on more risk? When the trend’s in your favor you’ll buy stuff a little bit more expensive but these are the stocks that could really get hit during earning season if they don’t … especially companies are scared to give positive guidance because there’s a lot of uncertainly with Brexit and trade and tariffs and stuff like that. I wonder what you think for … maybe the rest of 2019, is it, “Hey, I’m looking at earning season right now. Let’s see if some of these big caps pull back and then we can buy them.” Do you think that trend’s going to continue going forward?
Lou Basenese: 00:45:43 Yeah, look, I think on the big cap tech has to lead the market or the market’s not going to keep going higher. I don’t say that because I’m biased and I focus only on tech. If you look at the numbers, tech right now accounts for about 25% of the S&P 500. They broke out the different sectors but if you reconstruct it historically it’s about 25%. I’d argue that tech … that’s one in four stocks in the S&P 500. I’d argue that every stock, every company is relying on technology.
Lou Basenese: 00:46:09 If you’re not a tech company explicitly, you use tech as part to run your business whether it’s Amazon Web Services or any other software as a service-based business, you’re relying on that. I think tech has to keep putting up stronger earnings or the market’s going to lose its leadership and I think the market’s going to roll over. So, it gets back to the beginning of the interview. What leads stock prices higher? It’s ultimately earnings. So, if we don’t see and continue to see strong profit growth out of tech companies, I think that’s a sign for caution. At that point you have to be a bit more opportunistic and be patient. Wait for some valuations to come back in before putting new money to work.
Frank Curzio: 00:46:50 And let’s break that down. We’ll finish here because I love talking to you. I could talk to you for another hour, but let’s go over some of these big companies. You have Microsoft and Amazon. You brought up something interesting. As long as they continue to roll out new products, these guys are in cloud, very, very super high margin business. If you talk to people it’s still, I don’t know if I would say it’s in its infancy but it’s still no way close. Maybe I’d say third or fourth inning where the growth that they’re seeing in cloud is tremendous. You have Netflix which is streaming. It’s a huge industry, growth … But, then you look at companies like Tesla where more competition has entered the market. Google, Facebook have tried. Apple as well where you’re seeing basically it’s still an iPhone company, right? 70% of sales come from iPhones and they’re having trouble innovating.
Frank Curzio: 00:47:32 So, when you look at those companies, is it that simple where Microsoft, Amazon, you’re going to see earnings continue to grow, but I worry a little bit about Apple and maybe Tesla. How do you see in a large caps of the ones maybe that you like and don’t like?
Lou Basenese: 00:47:45 Yeah, look, I think it’s kind of what you’re saying without saying is the FANG trade is dead. You can’t just blindly buy all the FANG stocks on pullbacks. I think I went on the air saying that in July of last year and I think that’s true. You have to look at the companies. Microsoft would be one that I’d argue longer term, has tremendous upside because of the cloud services. It’s still definitely third, fourth inning. I’d agree with that assessment.
Lou Basenese: 00:48:09 By the same token that puts Amazon in the same space. They’re really early on AWS their cloud services has really driven their growth. Still plenty of room to go there. They’re getting into advertising. I think … I would be cautious on Netflix just because I think they’re taking on so much debt and at some point investors might just balk and say, “Look, at what point do you turn this into producing meaningful profits where you can service that debt.” I think there’s a potential there.
Lou Basenese: 00:48:38 Tesla, I’m a bit more bearish on. I just think as much as they want to be valued as a tech company they’re still just an automaker. I think it’s really premature on the autonomous driving. The regulations have not come into focus yet where anyone’s going to really be able to get self-driving cars out there on the road in a meaningful way in the next two to three years to generate enough profit to generate to justify the valuation that Tesla’s trading at. Great visionary leader but I think at some point investor’s demand results and not just vision.
Lou Basenese: 00:49:12 Running through some of the other, Apple. Apple has to prove it can pivot to being a services company. They are still largely an iPhone company like you said. I think the number is somewhere around 60% of profits and revenue comes from the iPhone. They have an increasing amount basically the size of a Facebook business that comes from services so about 40 billion plus. But, they’ve got to prove that that can keep growing to justify their valuation. A bit more constructive there. Apple’s always traded at a discount valuation to the market ant to tech in general. I don’t think that’s ever going to change. But, they’ve got to prove in the next coming quarters here that they are really going to be this engine of growth in services and really leverage that ecosystem that they have to generate more money from every consumer that’s using their products.
Frank Curzio: 00:49:58 I’m pretty impressed, man. We’ve thrown a lot of stocks out there. This isn’t scripted at all. You’re giving me every single stock I recommended you’re giving me. It’s not just the one liners or anything. But, I’m going to tell you, I’m going to give you a new way to analyze technology stocks right now. It’s the simplest way. Forget about everything else you know is-
Lou Basenese: 00:50:12 Lay it on me.
Frank Curzio: 00:50:13 … buy Tesla right now.
Lou Basenese: 00:50:14 Oh, no.
Frank Curzio: 00:50:15 I think Tesla will go to 300 before it really comes down. The only reason why I say that is because I don’t know one person in the world that likes Tesla. Everybody believes that stock’s going to be … I don’t know anyone who’s really … even the sell-side firms. And usually I’ve always been caught on the wrong side. I’m not saying that, listen they have problems. There’s competition entering the market. Tax credits are gone. Believe me, I know the whole inside story. Just go on Twitter there’s millions of people that devote their lives to posting on Twitter. Posting about Tesla.
Frank Curzio: 00:50:38 But, it’s just whenever I see everyone leaning 100% to one side, usually the opposite happens. I want to see if that happens here. If it does, then we can forget about everything else and just keep the system simple, right? We can start a new company.
Lou Basenese: 00:50:49 Yeah. Keep it simple. It’s funny, I look at hype cycles a lot too and I think that’s simpler. It’s similar. It’s a sentiment, right? When everyone’s super excited about a technology to the moon and there’s no critics, that’s when I start getting cautious because we tend to get overexcited about the expectations and then they fail to meet it. So, point well taken. I do actually have some really cheap Tesla put options that I own in the event that something goes haywire and they have to file for bankruptcy to get out of the cash crush that they’re in, the death spiral there. But, yeah, maybe it’s to be continued.
Frank Curzio: 00:51:20 You’re right. All in number … everything that you said makes absolute sense. I know they need to raise money. I don’t know why they’re not raising their money. They should discount their price by 25% raise four or five billion. And then at least you alleviate the concerns that everyone … you don’t have enough money.
Lou Basenese: 00:51:32 Exactly.
Frank Curzio: 00:51:32 But, the fact that they’re not doing that is kind of strange. I don’t know if they have to open up their books if they do something like that which could be even more dangerous. But, it’s just whenever I see everyone leaning to one side I’m always very cautious about it. And I don’t know anything about Tesla right now so we’ll see. But, yeah, hopefully I’m 100% wrong this way you make a lot of money.
Lou Basenese: 00:51:50 It’s a very small bet. Listen, you’re either a contrarian or the victim, right? I don’t know where I’ll end up on this one but.
Frank Curzio: 00:51:57 No, that’s great. Real quick, so Disruptive Tech Research is your website. Are you doing any media appearances because I know you go on Fox Business News a lot? Anything coming up?
Lou Basenese: 00:52:06 Yeah, I think I’ll be on Maria Bartiromo this Thursday talking about Facebook earnings and PayPal as well so that’s scheduled always subject to change, but that’s what’s on the docket for this week.
Frank Curzio: 00:52:16 All right, awesome, man. Well, Lou, I have to have you on more often. I love talking to you. I learned so much. Guys, look, this isn’t scripted. We’ll come up with a couple of topics that we might talk about but we just went everywhere and I know you provided tons of ideas and I know my audience really appreciate it so thanks so much for coming on, buddy.
Lou Basenese: 00:52:30 I appreciate the opportunity and good catching up with you, Frank.
Frank Curzio: 00:52:33 Hey, guys, great stuff from Lou. I think we dug into at least seven major tech trends. We talked about 20 different names, at least 20 names that he gave. There’s large caps and small caps. I was impressed he knew every one of them, was just firing away. This is a sector he covers. He’s been covering it for decades. Not surprising he knows so much. Hey, I know Lou for a long time. He’s truly an amazing analyst. Great writer. Always has original ideas and most important I know he cares. He always cares about his subscribers. He’s first to say if something’s … if he has a bad stock recommendation. He’s always open. He’s humble too which I love. I love brilliant analysts that are humble because it is a humble industry.
Frank Curzio: 00:53:14 You could think everything’s great and look at David Einhorn. You see a lot of analysts, Ackman get crushed on a lot of stocks whether it was Target, Herbal Life. Yeah, we’ve all been there all get there. I like people who are humble, willing to learn and Lou’s one of those guys. He’s just one of hundreds of people in my network that I use to find new ideas and even bounce my ideas off of him and he’ll ask me for ideas and we advertise each other’s products and stuff like that.
Frank Curzio: 00:53:42 So, yeah, it’s great to have that network just to bounce something off. If I find a tech idea, he’s the guy that I can run it by and say, “Hey, Lou, do you know anything about this?” “Yeah, I know someone else that covers it.” He’ll introduce me to somebody. Just as an example. But times that by how many analysts, how many professionals you know within the entire industry and we have a pretty good network and that’s why we’re coming up with a lot of original ideas which is leading to my educational segment on marijuana.
Frank Curzio: 00:54:11 Let’s break it down. Let’s smoke marijuana together … I mean let’s talk about marijuana together since it is one of the biggest trends right now. In terms of popularity. It’s not like a massive industry or anything. If you’re looking at company-wise you have Canopy which industry leader having a market cap of 16 billion. Or, Cannabis is nine billion, Tilray, GW around the same four or five billion. Village Farms, Zynerba. There’s just a lot of stocks out there and a lot of garbage out there.
Frank Curzio: 00:54:39 But, taking a step back here, there’s so many strategies that I’ve offered that you see out there and so many methodologies. Again, I always say not one strategy works or everyone would use it. You got to be open up to different strategies, different market conditions. Some things work some things don’t in terms of value and growth and top down and bottoms up and technicals. So, you want to be open to everything and be prepared. But, I have to tell you out of all the strategies ever, the greatest strat … if you want to make a fortune. If you want to make a fortune, become a drug dealer. It’s that easy.
Frank Curzio: 00:55:12 I’m not suggesting you build a Walter White style meth lab or join a Taliban and smuggle heroin from Afghanistan. Yes, Afghanistan is the number one producer of heroin. I’m not too sure if you knew that. These measures would definitely create some amazing cash flow for you. I’m not going to lie to you. But, unless you’re Pablo Escobar, the most you’re going to make being an illegal drug dealer is a few million dollars. It’s kind of peanuts compared to what you could generate selling legal drugs especially if you get the okay from the government.
Frank Curzio: 00:55:46 When you look at Pfizer, Merck, Johnson & Johnson, biggest drug dealers in the world. They sold more than $175 billion worth of their products last year. Alcohol, nicotine, caffeine, you keep going. Anheuser-Busch generated over 50 billion in sales last year. Heineken 24 billion in sales last year. Altria Philip Morris combined more than 50 billion in sales last year. The cigarette market alone is 900 billion globally. Look at Coca-Cola, Starbucks, generated over 55 billion in sales last year combined. Selling caffeine most of it from caffeine-based products.
Frank Curzio: 00:56:24 You go on and on about the money spent on buying legal drugs over the past 100 years. I could even break down the Kennedy fortune. This famous family fortunes that were generated from basically selling drugs. Kind of amazing. It’s a great business. It’s an awesome business. It’s kind of … I’m just pointing out facts. Don’t say, “Frank, you drug dealer you’re,” no, just pointing out fact. If you want to sell legal drugs, fine. You’ll make money probably get shot and killed, whatever.
Frank Curzio: 00:56:54 But, selling legal drugs especially when the government is on board is huge and that’s what happened when it came to the marijuana trend. In 2014 what do we see? Well, Colorado, a little bit later Washington got approved. So, you’re looking at all these states and it’s 10 now. So, you have 10 states that approved marijuana for recreational use. There’s 33 states that approved it for medicinal use. But, if you’re looking at the 10 states approve it for recreational use, that number’s going to double maybe triple inside of five years. Why? Because the math works.
Frank Curzio: 00:57:33 When I say the math works, I mean the math works for the government, right? Forget about us. The math works for the government and that’s extremely important when it comes to selling legal drugs. So, when you look at just take cigarettes for example. You see it on the pack, “Smoking causes lung cancer, heart disease, emphysema. May complicate pregnancy.” You have the warning and everything. Anyone who smokes cigarettes is very familiar with that. It’s the surgeon general’s warning. It’s on the side of the box. There’s no secret that it’s horrible for you. You know it, I know it and the government knows it. Numerous studies link tobacco to millions and millions of deaths, we all know it.
Frank Curzio: 00:58:12 Yet, cigarettes are still being sold in local stores. Why? Because of the government. You’re looking just in 2017 alone Americans spent $120 billion on tobacco products. You’re looking at settlement payments, past litigations, federal, state and local taxes, that amounts to $50 billion. That’s why everyone knows that they kill people, but they’re going to continue to sell it, right? They’re going to regulate. They’re going to punish the companies who are selling these products but they’re not going to ban them. No way. They’re not going to do that. Government makes too much money on it. They’re addicted to money. They know they can spend this money. If 50 billion means you could spend three, four 500 billion if you’re the government. You can spend whatever you want. Any way you can generate revenue it’s fine, that’s cool.
Frank Curzio: 00:58:58 It could say again, [inaudible 00:58:59] other industries. But, when it comes to marijuana specifically, it’s becoming a very big industry. Some people say it’s going to be $25-50 billion. And you look at Colorado, they were the first to approve marijuana for recreational use for a state. Now Canada approved marijuana. You’ve seen a bunch of Canada names come up now, right? But, when you look at the U.S. and you look at Canada specifically, you’re looking at a state that generated $1.5 billion in sales from marijuana last year. $1.5 billion. So, you look at combined sales for the past five years since they approved it in January 2014, it’s six billion total sales.
Frank Curzio: 00:59:42 And from the 1.5 billion Colorado said it generated 266 million in tax revenue. That’s free money just by signing a piece of paper and approving marijuana for recreational use which guys, anyone listening to this right now could get marijuana probably inside 30 minutes no matter where you live. I don’t even care if you live in the middle of Montana. 30 minutes easily. If you’re going to get drugs, and I hate to say this, but no matter what drug you take if you really want to get access to it, you’ll have access to it.
Frank Curzio: 01:00:11 So, with marijuana I’m not justifying it, whatever, I’m not saying that people … I’m just saying you’re taxing something that people are going to do anyway. Or, people are going to do any … you might as well tax it right, it just makes sense. So, Colorado said, “Okay, let’s approve this recreational use,” and then you have 10 states that follow afterwards. And now, you’re looking at the math, it works. Colorado is making a lot of money.
Frank Curzio: 01:00:34 Now, if you’re a state that hasn’t approved it and you’re looking at 10 states being California, Colorado, Washington, Oregon, Massachusetts, Nevada, Maine, Alaska and then you have Vermont and Michigan. Those are the 10 states and Washington D.C. You’re looking at the revenue that these guys are generating. California, $2.7 billion. You look at Washington hit a billion dollars but all the other states approved much later and their sales are just starting to ramp up like Massachusetts. Only 100 million, man that number’s going to go to well over a billion. It’s one of the most populated areas outside of California that approved marijuana for recreational use.
Frank Curzio: 01:01:12 And, if you’re a state outside of these 10 and you’re watching California 2.7 billion, Colorado 1.5 billion in sales, Washington over one billion in sales, and you’re seeing the hundreds of millions of tax revenues, what are you going to do? Because you could say, “Well, what about my constituents who don’t want,” well, 65%, I think it’s exactly 64% in the latest Gallup polls, of people in America believe that marijuana should be approved for recreational use. You’re talking about a very large number of people, right?
Frank Curzio: 01:01:43 Now, what was different back in 2013/2014, you had doctors, you had politicians against this but then you had what? Sanjay Gupta, who’s the lead CNN health correspondent or President Obama asked him to be the surgeon general, I believe, and he turned it down. One of the most popular doctors against it and then he came out and said, “Listen, guys, this is my fault. I have to issue an apology.” He’s like, “We were basing our studies on all this false research but there’s definitely benefits to marijuana.” He’s talking about medicinal.
Frank Curzio: 01:02:10 So, you’re talking about popular doctors, that’s just one, changing their mind. You’re talking about politicians like Schumer, Boehner, former speaker of the House. Feinstein, California. You’re seeing major politicians and they even had a 60 Minutes special on this showing how the parents were going to these politicians saying, “Hey, my son has autism. My son has schizophrenia and I couldn’t ever communicate with him and now look what,” based on marijuana based things that they’re taking, CBD or whatever, drastic improvement. Guys, look at GW Pharmaceuticals it’s an amazing company. The test results, everything is getting approved and they go to … you go to FDA, you go to a panel, everyone on these panels are approving it like 11-0, 12-0, whatever. It’s not even like up in the air. The results are dramatically improved by the things that they’re creating for kids that have these diseases that they can’t really communicate, they can’t really do anything and there’s a dramatic improvement so you’re seeing it.
Frank Curzio: 01:03:16 You’re seeing facts and now you have everything changing. People are more relaxed saying, “Okay, doctors say it’s kind of okay now.” Our politicians, the biggest sound boards out there, they could say whatever they want, change everyone’s mind. They can make up news, make up whatever they want but that’s what gets published all over the news all day and when they go from negative to positive on something, it’s going to be everywhere. That opened up this trend over the past couple of years to be really big.
Frank Curzio: 01:03:41 Again, you have the big companies that I’m sure you’re familiar with. The Canopy industry leader I mentioned and in Aurora Cannabis, Tilray, GW Pharmaceuticals. But, there’s a lot of other names. You’re looking especially in the Canadian market, Acreage Holdings just got, I won’t say got acquired, but it’s for $3.4 billion where Canopy, and this happened last week, is purchasing this company but I think it’s a $300 million payment upfront. I’m pretty sure these are the details but if I’m wrong you guys could email me, firstname.lastname@example.org.
Frank Curzio: 01:04:17 So, it’s something like $3000 million upfront but the rest of it will get approved once we get approval on the federal level in the United States. So, we have state approval but not federal approval which is important because if it’s not approved federally on the federal level, then banks can’t accept payments. It’s hard for payment processors. That’s what really … think about trying to buy something without being able to use a credit card on Amazon. On a lot of these websites. Shopify. And that’s what it’s like with marijuana. It’s difficult because it’s not approved on the federal level. But, when it does, now it’s going to open up for people especially more and more states approved this thing kind of like legalized gambling where everyone’s going to have access to this through the internet and they get it sent to them depending what state they’re in.
Frank Curzio: 01:05:02 But, that’s where it’s going. The fact that Canopy actually made this acquisition, again, it’s kind of a weird acquisition because they said that they’ll take them over if the U.S. approves marijuana on a federal level but they gave them a $300 million cash ingestion. Acreage is a pretty big company.
Frank Curzio: 01:05:19 You’re looking at Curaleaf, Charlotte’s Web, Harvest Health and Recreation, iAnthus Capital, Mjardin, Planet 13, The Original House, TILT, Trulieve. These are all of a ton of companies that popped up. I have to say looking at this industry, there’s a lot of garbage out there. A lot of garbage. Guys looking to make a quick buck. Changing their name to cannabis whatever. And, when I looked at Canopy spending 3.4 billion on Acreage Holdings, I started looking at the valuations of what these guys are trading at. Right now the average company and these are U.S. based that are trading in the U.S., are trading at more than five times enterprise value to revenue and more than 20 times enterprise value to EBITDA. EBITDA’s a pure measure. It’s a much pure measure if you’re going to buy companies they really focus on EBITDA strips out. Yeah, it’s a more pure earnings number where you can realize okay how much money do I have left over to pay over debt and your interest payments and stuff like that. But, when I look at 21 times that’s an insane, insane valuation.
Frank Curzio: 01:06:31 Now, for us when we’re covering this industry for me, I want to look at plays that are original. Plays that have great management teams. For those of you who are Curzio Venture Opportunitiessubscribers, I’m recommending a stock that 99.99% have never heard of. And you never heard of it because they’re going to hear about it probably in a month or two from now. It’s not going to come up in any stock screens because right now it’s a holding company. But, they’re making major acquisitions in the space. They’re going to be closing down. I don’t want to give too much away, but they have a superstar management team. People who left … partners at Goldman Sachs, some of the biggest hedge funds worked at numerous jobs where these guys get paid several million dollars a year. And they all left to create this one company and they’re making a major move.
Frank Curzio: 01:07:18 The only reason why I found it because I have good contacts in the industry, but this is the stock that I’m recommending today. It’s a stock that you’re probably going to hear about from all the stock promoters probably a month, two, three months from now. Again, you’re not going to find it on any screens because the company really doesn’t exist. So, it’s just a pool of money and now they’re buying into this industry and you’re going to go from zero sales to 250 million in sales this year.
Frank Curzio: 01:07:42 So, it’s kind of amazing when you see a company like that because you’re not going to know about it until everything’s structured, everything’s put in place. But, one of our contacts alerted me to it and I did a ton of research on it and that’s the name we’re coming out with today. Going forward the reason why I’m doing this segment and I’m teasing Curzio Venture Opportunities. It’s a very good pick and we’ve been doing well on that newsletter. I love it because it just allows me to tap so many people in my network and find original, small cap ideas that you’re not going to find anyplace else.
Frank Curzio: 01:08:08 But, more important is we’re going to start covering this trend going forward in marijuana. I’m going to cover it the same way I did in 2013/2014 when nobody was really interested in it which is kind of amazing. But, there’s more risk in this sector than opportunity right now. And, unfortunately, that’s what happens when a sector is completely hyped. When you’re seeing thousands of promotions. Everyone in our industry is coming out with different promotions in marijuana and John Boehner and all this stuff.
Frank Curzio: 01:08:35 I get it. It’s fun. You take advantage of a trend. But, when I’m looking at the valuations of these companies even if the U.S. approves marijuana at a federal level, even if you have 25, 30 states approving it, these things are trading as if the industry is going to be three times the size it is and it’s not going to be that big at least over the next three, four years. It’s big, it’s huge but these valuations are absolutely insane. It’s the same thing that we saw with the technology bubble. It’s the same thing we saw with Bitcoin and all these crazy ICOs that came out in 2018 that are all worthless now. And it’s the same thing when it comes to marijuana. So, we have to be very careful here in the stocks we select and the one that we selected has one of the best management teams, few people know about it. They have incredible upside potential and I actually truly believe that this company will be one of the premier players in the entire industry within five years. Maybe even three years.
Frank Curzio: 01:09:29 Because what they’re doing, how they’re acquiring, it’s going to be a roll-up strategy where they’re going to go out there and purchase the best company and they have one of the best roll-up management teams. Roll ups means think Waste Management, Kraft, tons of companies. What they do is they buy tons of small players after doing their due diligence and just integrate it into one major company and become the leader in the space. A lot of times roll ups fall flat on their face later on especially if you don’t have experienced management team because there’s a lot of leverage involved, a lot of debt. You’re using shares also to purchase other companies. But, if you do it right you turn these companies to multi-billion-dollar operations.
Frank Curzio: 01:10:08 I think that’s what’s going to happen with this stock we’re recommending. That’s just one name. There’s two or three or them on my radar that I like as well, but I have to say, researching 25, 30, 40 of these names most of them it’s pretty crazy. Even some of the big names like Tilray. It’s very, very dangerous. Canopy as well. These stocks are extremely overvalued so you want to try to find those diamonds in the rough and I think that we’re doing that.
Frank Curzio: 01:10:31 But, going forward Curzio Venture Opportunitiessubscriber you’re going to see some more marijuana picks especially the ones coming out today. We’re publishing today and let me know your thoughts once you get it. Frank@curzioresearch.com and if you have any questions about this trend let me know especially if you’ve been investing in this trend long term. I’m fortunate to have a very big audience right now and I’m sure there are CEOs out there for the marijuana companies here in Canada, everyplace, send me an email. Again, this is a network. We want to try to get everything right and the more bigger our network, the more better information we’re going to get. The more ahead of trends we’re going to get. We’ve been doing a lot on this podcast especially over the past couple of years as the audience grows thanks to you guys. Mostly word of mouth because we don’t really market too much but that network’s getting bigger and bigger and it’s leading to us finding some really great ideas that I could share with you guys and also my subscribers.
Frank Curzio: 01:11:18 So, again, any questions, comments feel free to email me at email@example.com. I know a lot of you are going to be happy that I covered the marijuana. I get so many questions on marijuana, it’s awesome. But, yeah, that’s how I feel about the industry. I think it’s a fantastic industry. I think it’s going to continue to grow, but the stocks are so far ahead of themselves. Be very, very careful. There’s great opportunities in the space, but not as many as you think. I would say a lot of these companies at least 50% of the industry probably won’t be around in three years from now.
Frank Curzio: 01:11:44 And now evaluations are crazy. Management teams are dumping their stock and it’s pretty crazy. Again, you’re going to get all the garbage. You need all that washed out, all the people trying to make quick dollars or a quick buck on you, me, mom and pop investors. You’re going to see a washout over the next couple of years, but there’s a lot of good names in the space I think that have positioned especially the one that we just have at Curzio Venture Opportunities. If you want more information on that you can go to our website curzioresearch.com.
Frank Curzio: 01:12:07 Okay, guys, enjoy earning season. Enjoy hockey playoffs. Enjoy basketball playoffs. Lillard, I don’t know if you saw that shot against Oklahoma City. Fantastic. One of the most underrated people, underrated players in the NBA, fantastic. And I think Portland has a shot to make the finals. It’s pretty crazy but still got work to do. But, if they win the next round they’re going to be playing the winner of Golden State Houston and those teams are going to beat the crap out of each other. It’s going to be interesting. Again, a lot of people not really crazy about the NBA. Everybody loves the NHL. Great hockey playoffs. You got to give [Alkin 01:12:45] a shout out for the Islanders. Let’s see what’s happened, but have some fun. Enjoy the playoffs. Enjoy earning season and I’ll report back to you guys in seven days. Take care.
Announcer: 01:12:56 The information presented on Wall Street Unplugged is the opinion of its hosts and guests. You should not base your investment decision solely on this broadcast. Remember, it’s your money and your responsibility. Wall Street Unplugged produced by the Choose Yourself Podcast network. The leader in podcasts produced to help you choose yourself.
Editor’s note: In today’s issue of his flagship advisory, Curzio Venture Opportunities, Frank reveals a tiny marijuana play 99.9% of investors have never heard of. But it could become one of the biggest marijuana companies in the world inside of five years. And the rewards for early investors could be incredible…
To learn more about Venture—and how to access this opportunity—go here.