Where To Find Value Today

During their recent episode, Taylor, Carlisle, and Zeke Ashton discussed Where To Find Value Today. Here’s an excerpt from the episode:

[Zeke] Well, it’s taken me to a couple of surprising places. You know, the AI winner loser trade of, you know, the last two years, obviously had a big break in July, actually end of June, early July. But one of the things that we discovered was, you know, one of the, I would say one of the victims of the AI loser trade for a couple months was the big U.S. exchanges. And so my view is with the, you know, the tremendous increase in trading, we’re now going to go 24 hours a day, I guess, five days a week. We’re introducing new products, options are really picking up. So we own a basket of the exchanges.

We own CME, we own ICE, which is Intercontinental Exchange. And then I own, as well, the OTC Markets, which is the small exchange. It’s the exchange for smaller companies that don’t want to list on the major exchanges, or for international companies that would like to have a listing in the U.S., but they don’t, you know, they don’t want to go through the U.S. approval process and all that because they meet all of the regulatory requirements in their home exchange, and they don’t want to have duplicate regulatory costs and all that stuff. And so, yeah, it feels like, you know, hey, there’s some risk there as well, because, you know, to the extent that if volumes were ever to decline, these companies obviously have some operating leverage to that. But the valuations got very interesting.

So, for example, Intercontinental Exchange was trading at, and I think it still is, trading at less than 20 times free cash flow. And then CME is slightly more expensive. But CME also owns kind of this hidden asset.

They own a 27% stake in the S&P Index business, S&P Global. So you essentially own a call option on the S&P 500, you know, index, which is a pretty good royalty to own. I would say it’s a royalty and a call option, because if the dynamic that you just talked about, Toby, continues, which is people just continue to plough their money in the S&P 500, then, you know, that benefits CME as well.

And that’s one of those things where there’s not a lot of incremental costs for them. And so it’s a nice, it’s a nice business. And these businesses have remained capital light.

They have not had to spend money on AI, even though I think that they will probably be beneficiaries of AI going forward to some extent. But it’s hard to imagine their profit margins getting much higher. These are 60% profit margin businesses.

So that’s how we, that’s one of the places we found, I don’t want to say hide out, because that feels like it’s not, I mean, it’s not a defensive move. It’s an aggressive move. But we feel like relative to some of the other things we’re seeing, we feel like that’s a place where we can benefit, you know, in a number of different scenarios, including a scenario where things don’t go great for the stock market, but there’s just a lot of volatility and a lot of trading.

And, you know, we would benefit from that as well.