From Earnings Calls to Investment Ideas: Bottom-Up Stock Picking

During their latest episode of the VALUE: After Hours Podcast, Carlisle, Taylor, and Eric Cinnamond discussed From Earnings Calls to Investment Ideas: Bottom-Up Stock Picking. Here’s an excerpt from the episode:

Jake: I was just going to say that some of my favorite work that Eric does is bottom up– He’s one of the best bottom-up economists. So, looking at the companies, reading all their transcripts and earnings calls, and actually ferreting out like what is happening from the bottom upwards, rather than all the economists tend to be more top down, it feels like. But Eric, maybe you could share some of the interesting findings that you’ve been noticing lately on the last update that.

Eric: Yeah. The reason we do that– I’m glad you brought that up, because that is something, I think it’s a little different. A lot of bottom-up analyst and managers, they don’t have a macro view. But because we normalize earnings in our valuations, it’s very important for us to understand where we are on the profit cycle, whether you’re peak or trough.

In 2009, you’re in the trough, you don’t want to use those earnings to buy a company because they’re too low. And then I would argue currently margins are so high, you probably don’t want to use these margins either to buy a company. So, what we do is– We have a possible buy list of about 300 names. And every quarter, we read the releases and conference calls and come up with our macro view.

And it’s a couple of pages, kind of a summary of our highlights, and it’s a little over 100 pages of notes. But it’s interesting, because I think one of the things we picked up on pretty quickly in 2021 was inflation, because we were seeing it with all of our companies, but we weren’t seeing it yet in the government data. So, there’s things like that I think we can pick up on. In fact, I wrote a blog post called Buy Things. And my whole theory was the companies are clearly communicating price increases. Go out, buy some appliances.

Jake: [laughs] Yeah, get out and find that.

Eric: I bought like three years’ worth of weeding feed and I think I made like 30% on that.

Jake: [laughs]

Eric: So, you could see a lot of things through the bottom up that you can’t really see in government data, which is often seasonally adjusted, massaged. Usually, it’s revised and it’s dated. So, things we’re seeing right now– We touched on the two economies, economy one, economy two, one doing great, one doing awful. I would think that’s the biggest theme right now of the disparity so large.

And then going to the fiscal side, a lot of cyclical companies tied to the economy, manufacturing, construction actually doing quite well. You have a lot of spending on whether it’s data centers, semiconductor plants, infrastructure across the board, roads and bridges. We had an asphalt company. Gencor Industries, we owned for a while. Did very well, but that was just the government flooding the system with money to pave roads. So, that’s done well.

Transportation has been weak, but I think that’s going to change. I think that’s going to pick up. Energy has been pretty good. Natural gas has been awful, but oil has done so well for these companies. There’s quite a bit higher than cost and they’re doing well. Services, energy service has lagged the EMPs just because EMPs have had so much more pricing discipline this cycle.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

Apple Podcasts