GameStop is selling up to 3.5 million new shares, looking to raise money amid their newfound hype and popularity in the investing world.
Dan opens the show by explaining why this is actually a very smart business move…
But he says even though it’s the right move for GameStop, he wants no part in it. And he cautions anyone else still thinking about jumping on this train.
Then Dan invites Kevin Carter onto the show to talk about one of the fastest-growing areas anywhere in the markets, that sadly many Americans overlook.
Kevin is the founder and Chief Investment Officer at EMQQ, an Emerging Markets Internet and E-Commerce Index. Over the past 20 years, he’s partnered with Princeton economist and indexing legend, Dr. Burton Malkiel, focusing on China and emerging markets, ultimately creating the EMQQ Index.
During their conversation, Kevin teaches Dan some stunning facts about the massive opportunity investing in emerging markets outside of the U.S. provides today… (like did you know that over half of the world’s mobile payment users live in Africa?)
Kevin makes a very strong case for putting money in emerging markets today, even listing out a handful of his favorite personal holdings from his index… like one he calls the Amazon.com of Poland… another known as the Amazon.com of Africa… and even one little-known fintech company that Berkshire Hathaway bought 5% of during its IPO.
Kevin says that if you have a long-term timeline, you absolutely need to take a look at the emerging markets internet sector… He calls it the “tip of the spear” when it comes to global growth.
And finally, we had an ultra-light mailbag this week…
So light, in fact, that Dan decided to hold off until next week’s episode.
So don’t forget, please send in any questions you may have, any comments on the show, or even any politely-worded criticisms into us at [email protected]…
Until then, you can listen to Dan and Kevin’s conversation and more on this week’s episode.
Founder and CIO of EMQQ
Mr. Carter is the Founder and CIO of the Emerging Markets Internet & Ecommerce ETF (NYSE: EMQQ) and Chairman of the EMQQ Index Committee. Prior to EMQQ, Mr. Carter was the Founder & CEO of AlphaShares, an investment firm offering five Emerging Markets ETFs in partnership with Guggenheim Investments. Previously Mr. Carter was the Founder & CEO of Active Index Advisors acquired by Natixis in 2005 and the Founder & CEO of eInvesting acquired by ETRADE in 2000. Mr. Carter received a degree in Economics from the University of Arizona and began his career in 1992 with Robertson Stephens & Company.
1:37 – The timing is perfect to sell more shares of this company, but Dan isn’t buying… “GameStop is going to sell up to 3.5 million new shares.”
8:04 – “The lesson here for you is yes, they ought to be doing it. It’s the right thing to do and you gotta ask yourself if you ought to be buying it? I dunno if that’s the right thing to do at all…”
9:30 – This week’s quote comes from The Art of Worldly Wisdom by Baltasar Gracián… “Take no pleasure in the wonder of the mob, for ignorance never gets beyond wonder. While vulgar folly wonders, wisdom watches for the deception.”
11:53 – This week, Dan invites Kevin Carter onto the show. Kevin is the founder and Chief Investment Officer at EMQQ, an Emerging Markets Internet and E-Commerce Index. He’s partnered with Princeton economist, Dr. Burton Malkiel, for over 20 years focusing on China and emerging markets, ultimately creating the EMQQ Index.
15:40 – Dan asks Kevin about working with indexing expert Dr. Burton Malkiel… “How did working with him lead you to focus on China and emerging markets?”
21:28 – Dan frankly says, “Tell me about investing in China. You said yourself, ‘how in the world do you go about doing that?’ but there are plenty of China ETFs around nowadays though… that question is answered, isn’t it?”
27:23 – Kevin says, “I think the problem with the China ETFs, and with traditional emerging market ETFs, is that there is an incredible amount of growth in these places, but the companies that are public, that dominate the indexes, aren’t participating in that growth.”
30:56 – Kevin explains how emerging markets have changed in the last few decades… and how something he calls “Emerging Markets 3.0” has had a hugely positive impact.
34:50 – Kevin shares a compelling investing story of thinking outside the box that paid off early in his career, which ultimately led to him launching EMQQ 100 days later…
40:57 – Kevin lists out a handful of his favorite personal holdings in his index, including the Amazon.com of Poland, the Amazon.com of Africa, and even a little-known Brazilian fintech company that Berkshire Hathaway bought 5% of at IPO.
45:16 – “If you think about how the smartphone has changed us, then you map it over to where all of the world’s people are, the emerging markets, then the story gets really big…”
48:22 – “The continent of Africa represents more than half of the world’s mobile payment users…”
57:06 – As their time winds down, Kevin leaves the listeners with one final thought, “I think that anybody who wants growth, anyone that has a 5, 10, or hopefully 20-year or longer timeline… I think that this sector, this emerging markets internet sector, is the tip of the spear of where global growth is.”
Announcer: Broadcasting from the Investor Hour studios and all around the world, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research.
Today we will talk with Kevin Carter. Kevin Carter is the chief investment officer of EMQQ, which is also the ticker symbol of his ETF, the EMQQ Emerging Markets ETF, and he'll tell us all about his odyssey of how he just went on a mission to change emerging markets ETFs and what he came up with. It's going to be interesting, I promise.
In the mailbag today I've got nothing. You guys were really lazy this week. Come on, don't forget. Write us at [email protected]
In my opening rant this week, I'm going to talk about something that is actually a very good investing lesson. But it's funny, and it's nothing I want to buy, but it's something that they definitely ought to sell. A little intriguing, right? That and more right now on the Stansberry Investor Hour.
So what is it that they should be selling that I am not buying? It's GameStop shares. This company, of course they were the site of an incredible short-squeeze mania a couple months ago. The stock started out the year at less than $20, and it roared straight up in a few days – in a couple of days, two or three days. Boom, $480. Just insane action.
And then it crashed 90% down to $40-ish, and now it's back up. As we speak, it's around $180. Just call it $180. So crazy action. I think the market cap at this point is between $12 billion and $13 billion. I think it's like $12.6 billion.
Well, what they're doing right now, and they just announced this this week, GameStop is going to sell up to 3.5 million new shares. They say they'll sell no more than 3.5 million shares, and they will raise no more than $1 billion.
And I can understand the limit, 3.5 million shares. They've got 65 million, roughly outstanding, so it's just call it 5% maximum dilution, which is not too terrible.
But the amazing thing here is this is a good lesson for investors, and it's something I learned from Marty Whitman, who is one of the old-school value investors. He passed away a few years ago, but he's a really brilliant guy, and I recommend his books. I've read a couple of his books.
Whitman, he told the story in one of his books. He was working with the CEO of a company called Neighbors, I think it was... Neighbors Industries, an oil and gas company. He finally convinced the CEO – he said, "You don't raise money when you need it. You raise money when you can, when the market is offering such good terms that you just can't say no."
And that's what's happening with GameStop. Now it just so happens that they need it, right? Their revenue in the past three years is down almost half. It's down like 45%. It was $9.2 billion, and I think it's like $5.1 billion now. Maybe $1.5 billion, not even a third of it, is online sales.
So all the rest of it is coming through their stores. And of course in 2018, they got rid – they sold their AT&T stores. They had something like 1,300 AT&T stores, and they sold that business. They sold those assets. So all they're left with is GameStop stores.
Look, I actually have a soft spot for GameStop stores. I went to one recently. You walk in there, and it's all these physical video games, vintage video games. You can get old video games there, and people buy and sell and trade them. It's almost like a swap meet, sort of. It has that aspect to it. But it's a retail store.
The people are very happy to see you, and they're very talkative. There's the two people who work there and then the three who kind of hang around. So it's this community gathering spot for hardcore gamers.
So I have a soft spot, but let's face it. It's a crap business. As soon as they got rid of those AT&T stores, what happened? Well, the revenue disappeared. The red ink, you can see it. Each year by year, the red ink just goes farther and farther up the income statement. Now operating income, EBIT – earnings before interest and taxes – operating income is negative, like negative $250 million.
Well, the market cap's $12.6 billion. It's trading at roughly 50 times negative – 50 times losses, right? So the stock market has given GameStop a gift. All these insane retail investors trading this thing on Robinhood and wherever else they are trading it have given GameStop an incredible gift. They're now able to raise money at $180 a share or whatever.
And it's an at-the-money kind of offering. So what they'll do is they just tell you how much they're willing – how many new shares they're willing to sell and how much they're willing to raise, and then they periodically will go into the market as long the price holds up.
So they're not committed to anything, really. If they sell half a million shares and then the price tanks and they don't want to sell any more because it's too low to raise any decent amount of money, they don't have to do it.
So if I were them, man, I'd be getting to that 3.5 million lickety-split, right? So they definitely should do this... absolutely. When Tesla hit $900, selling new shares would have – a whole bunch of them, as many as you can dump on the market and get away with, definitely would have been the right thing to do.
Any time you get a situation like that, it's a gift. They should sell new shares. So that's what they're going to do, and at current prices they could raise a little over half a billion, a little over $600 million, actually, maybe $650 million at recent share prices, if they sold all 3.5 million at the current price.
And they darn well should because they've got a problem, which is they don't have a business that is sustainable. They're bleeding. As soon as they sold those AT&T stores, you just look at the next three income statements and it's red, red, red... a total of $1.5 billion of net losses.
So they need to do something. They need to turn it around, especially if they don't want the share price to go back to $3. That's where it was. That's where it was not very long before it was $480, OK?
So this business, who knows what they'll do. Just say they could raise the $600 million, who the hell knows what they're going to do with it. They're not going to open more GameStop stores, right? That's a disaster. That's over. That's like Blockbuster, right?
But the lesson here for you is, yes, they ought to be doing it. It's the right thing to do. And you've got to ask yourself if you ought to be buying it. I don't know if that's the right thing to do at all.
And it's good for investors to know this because then you get a business that you like, and you see that – say you've been holding it a while or something. Then all of a sudden, the shares just take off and you think it's too expensive.
Then the company comes out and says, "We're going to sell 10 million new shares or whatever," and the price drops 15%. It could actually be no problem at all for you as an investor. It might be the right thing to do. It depends on the business.
I gave that example of the lesson where Marty Whitman was talking to an oil and gas CEO. Well, you've got to think, oil and gas – highly cyclical. You never know what's going to happen to the price of the commodities. If the commodity price goes way up and interest rates are low, you ought to raise money however you can. I think he was talking about debt.
And another one of these companies that went bananas did the same thing. AMC Theatres, I think they got commitments for $900 million of debt and equity, roughly half and half, maybe a little more equity. But that's what you should expect to see, and in the case of these companies, especially GameStop, I don't think you should partake. That's all I'll say about that.
OK, time for the quote of the week. It is from a book called The Art of Worldly Wisdom by Baltasar Gracián. It's a neat old book. I do recommend it. It's got all kinds of short, little bits in it. It reminds me of Marcus Aurelius' Meditations or something like that.
And the quote is: "Take no pleasure in the wonder of the mob, for ignorance never gets beyond wonder. While vulgar folly wonders, wisdom watches for the deception."
A wise investor watches the GameStop situation and says, "Yeah, I don't think it's worth $12 billion." I'm not buying. I don't care how much money they raise. They have to prove that they're worth $12 billion before you want to get anywhere near the thing. I just thought that was a great little classic quote that applied there.
OK, let's talk with Kevin Carter. Let's do that right now.
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Today's guest is Kevin Carter. Kevin is the founder and chief investment officer of EMQQ, an emerging markets Internet and e-commerce index. His experience and storytelling ability in the emerging markets China space might resonate with you all today.
Kevin is a die-hard value investor and Buffett fan, but also a believer in indexing, having partnered with Princeton economist Dr. Burton Malkiel for over two decades focused on China and emerging markets, which has culminated in the creation of EMQQ.
Kevin's talk on the future of emerging market investing and the rise of a digital consumer revolution has been of particular interest of late. You know what, here he is. He's going to talk about it today.
Kevin, welcome to the show.
Kevin Carter: Thanks for having me.
Dan Ferris: So the first thing I have to ask about, maybe not to many people but to me, Burton Malkiel, he's like a financial celebrity. I think it's really cool that you got to work with him. So you've been working with him for two decades?
Kevin Carter: I have been, and he is sort of a celebrity. He's also maybe the coolest, best human I've ever known. I actually met him in 1998 in the spring. I was a young, cocky, naïve, perhaps, value investor
I was shorting Amazon.com when it had a $1 billion market cap, and I lost about a third of my net worth in a day and a half. The same week that that happened I had seen a company called K-tel change its name to K-tel.com, and the stock went from $1 to $30 in one day.
I said, "Oh my gosh, I've read about this." I found my copy of A Random Walk Down Wall Street, and I pulled it off the shelf. I thumbed through it, and I found the chapter on valuations and bubbles.
There was a quote from the 1960s electronics bubble where Jack Dreyfus had said, "Take a company called Shoelaces, Incorporated, change the name to Silicon and Electronic Furth-Burners, and a stock which used to sell for six times earnings would now sell for 45 times earnings because the words 'silicon' and 'electronics' were plopped in."
I said, "I have to call this guy. It's right out of his book." And so I used whatever the search engine was back then to pull up Burt and his Princeton website. His page came up with his class schedule and his office phone number.
I dialed the phone, and he answered the phone and one thing led to another. Yes, we've been working together for over 20 years now.
Dan Ferris: Wow, great story. The '60s, that was the era of Powertron Ultrasonics. That was one of the names that I remember.
Kevin Carter: That was before my time, but I believe that might have been one of the names – one of the companies referenced in my copy of A Random.
Dan Ferris: Yeah. It's also in – John Brooks wrote a pretty good book called – I think it's called "The Go-Go '60s" or something like that. I dip into it now and then, from the same period.
But really cool that you work with Burton Malkiel. To me, Burton Malkiel, he's the indexer guy. He's the "you can't beat the market" guy.
How did working with him lead you to focus on China and emerging markets?
Kevin Carter: Well, it's an interesting story. As I said, I called him that day and said, "Hey, Dr. Malkiel, you need to see this. It's right out of your book." He asked me to fax him over a couple of stories from Bloomberg, which I did.
A year later I had been convinced to start an online brokerage firm that I had talked about conceptually with people, which was one of the first companies to trade fractional shares. So you could buy $3 worth of Coca-Cola or $5 worth of Cisco or whatever it was. I thought that was very important to help individual investors invest directly in the stock market.
I called him up, and I said, "Dr. Malkiel, I don't know if you remember me. We talked last year." He said yes. I think he may have not been truthful. He's a very nice person. But anyhow, he said that he remembered me.
I told him what I wanted to do, and I told him I thought it would be good for investors and he agreed. I said, "Well, would you be on my advisory board?"
And he said, "I think it's a great idea, but I want to meet you first." So I flew out to Princeton a month later, and we had a three-hour lunch and we started to work together.
That company was called eInvesting, and the product was called Build Your Own Fund. We sold the company to E-Trade in June of 2000.
And then after that, a year later we had stayed in touch, and I said, "Burt, I think we can actually do a different kind of business that is basically building customizable S&P 500-based separate accounts," something that's now called direct indexing.
And so the idea was that you would buy 50 or 100 stocks to track the S&P 500, which you could do pretty closely with 50 or 100 stocks. Then that would allow people to customize. So they could leave out tobacco stocks or anything they wanted to do to customize their portfolios.
And then you could also do tax-loss harvesting to beat the index on an after-tax basis. So it was sort of a math trick. If your portfolio owned General Motors and the auto industry went down, we would sell General Motors and buy Ford.
The idea was at the end of the year you'd have a pretax return that would be the same or close to the S&P 500, but on an after-tax basis you would have losses that were valuable if you're a taxable investor, and thus you could "beat the index."
So we started this company, Active Index Advisors, and hired some guys from iShares to be the portfolio managers and found the tech guys that could build the vision. We ended up selling the company to Natixis Asset Management in December of 2004. I think the deal actually closed the first week of 2005.
But a few months before that Google had gone public, and as part of their IPO, they had an investor planning day for their employees. They invited two guest speakers to talk to the Googlers about investing. One of those was Bill Sharpe, and the other was Burton.
I wasn't involved with it, but Burton was in town for it. We had dinner the night before, and Google was sort of the buzz back then. A few months later my phone rang, and it was a guy at Google who had Googled me and say, "Hey, I want to invest in this Active S&P 500. How do I do that?"
And I said, "Well, who's your adviser?" Because we were a separate account manager that was working with advisers at Morgan Stanley and Credit Suisse and Deutsche Bank.
He said, "Well, I don't have an adviser, and I don't want an adviser. I just want to buy this particular strategy from you."
I gave in and said, "Fine, I'll do it for you." And so I became his default investment adviser, and then he introduced me to eight or 10 other Google early employees that also became my clients.
Meanwhile, Burton was going back and forth to China. He had taken a great interest in China. A couple of his Princeton colleagues were Chinese nationals that had return to teach economics in Beijing. All of that back and forth led to a whitepaper that was published in the Journal of Investment Consulting in early 2005.
The Google people found out about this and said, "Hey, can Burton come down here and talk about investing in China?"
And I said, "Sure, next time he's in San Francisco I'm sure he'll be happy to come down and do that." A couple months later Burton was in town, and we drove down to Mountain View one morning.
He gave his talk about China, and all of these Google people looked at me and said, "We want to invest in China." Somehow from the moment that talk ended until today, my entire life has ended up revolving around what does that even mean to invest in China, and how in the world would you go about doing that.
That was 16 years ago, this month. It was a random occurrence, but that has become my life, figuring out China and more broadly emerging markets.
Dan Ferris: You yourself took a random walk down Wall Street and found a career. That's cool, very cool.
So tell me about investing in China. You said to yourself, "How in the world do you go about doing that?" But there are plenty of China ETFs around nowadays, though, right? That question is answered, isn't it? It's answered pretty well.
Kevin Carter: Well, there's lots of ways to do it, but there is one I think what became a very obvious answer to me. So there are lots of products out there, but I think most of them are not good for investors to use.
Let me tell you my evolution in thinking about investing in China and emerging markets more broadly. After Burton gave that talk and these people looked at me and said, "We want to invest in China," we drove back to San Francisco.
When we got back to the office I walked over to our investment team, and I said, "Look, the Google people want to invest in China. Give me a list of all the companies in the China ETF from iShares," which has the ticker symbol FXI, which was the first – and I think it's still the biggest – China ETF, because I assumed that that's what we would use for these people at Google.
As mentioned, I'm a Warren Buffett fundamental person, first and foremost. So I like to look and see what exactly is in an ETF. Before they gave me the list, Burton pulled me aside, and he said, "Look, when you look at the list of all the companies in the China ETF from iShares, you're going to see that the majority of them are Chinese government-owned banks and oil companies."
And I said, "Yeah, I've heard about that. That doesn't sound like a good thing to me."
He said, "Well, let me tell you how a Chinese state-owned bank works." He gave me this example. He said, "You've got a Chinese manufacturing plant. It's got 15,000 employees.
It's incredibly inefficient. It's been losing money for a decade, and it's about to run out of money. It goes across town to the Chinese state-owned bank and says, "We need more money."
Now a normal banker would say, "No, you can't have any more money because you didn't pay us back the last money we loaned you."
But the state-owned bank doesn't say that. The state-owned bank says, "Well, if you run out of money, these 15,000 employees will be out in the streets protesting, and we can't have that." And so they make another loan to an otherwise bankrupt company.
And that made me literally nauseous inside when he explained that because with my simple Omaha brain, earnings equals value, and the growth of earnings equals the growth of value. If the people that run these companies don't care about that, why would you invest in them at all?
And in the case of the China ETF back then, it was 80% in state-owned enterprises and had very little exposure to the consumer, which is really what you want in emerging markets. That's the thing that's emerging, the people.
So that bothered me, and that is the biggest problem with the China ETFs. It's the biggest problem with the broad emerging markets ETFs from people like Vanguard and iShares, which it's not as bad in the broad emerging markets ETFs, but still about a third of the index and the ETFs that track it are in state-owned enterprises.
I think people are going to continue to be disappointed with their returns if they're using these traditional approaches. I just looked at this yesterday. The returns of the China ETF from iShares, the FXI, it's basically zero in the last 15 years, right?
There's been a little bit of return in the last run that's occurred, but if you rewound the tape to a year ago, you didn't make any money in 15 years. Again, if you're buying companies that don't care about growing their profits, I don't think you should expect to make any money.
This is the problem with the broad emerging markets ETFs. Well, first of all, a lot of people have given up on emerging markets because there was a lost decade where for 10 years people have made zero money. In fact, they lost money.
The last 12 months there's been some returns so that the 10- or 11-years numbers are positive. But the 13-year returns for the MSCI Emerging Markets Index is zero.
I think that what happens in emerging markets and China is that it's the biggest value trap in the world because people – and I see this all the time. A chief investment officer from a major investment firm will go on TV or publish a report and say, "Look how cheap emerging markets are.
The P/E is 12 or 13, so it's half the price of the S&P 500. The economies are growing twice as fast, and so I'm getting twice the economic growth. I'm paying half the P/E multiple. How can that not be a bargain?"
That is a trick. That is I think the single biggest value trap in the world because if you really knew and understood what Petrobras, the Brazilian state-owned oil giant was or the Agricultural Bank of China, you probably wouldn't want to own those companies if they sold for five times earnings.
I think that the problem with the China ETFs and with the traditional emerging markets ETFs is that there is an incredible amount of growth in these places, but the companies that are public that dominate the indexes aren't participating in that growth. They represent the legacy economy and not really the future economy.
Dan Ferris: I assume then you set out to right that wrong. That sounds like your real mission to me. I know you're focused on China and emerging markets, but it sounds like you've got a very specific mission to right this structural wrong and China and emerging markets ETFs.
Kevin Carter: Well, I think that's absolutely right. I like to fix things, and I'm an optimizer as a person. I tried to optimize the investment system with fractional shares and direct indexing, and then I got pulled into China and I have spent 15 years trying to optimize that.
As I tell people, there's two things to know about investing in China and emerging markets, and I learned both of those things in the first 30 minutes on the job. The first, really the second, thing is the thing I just talked about, the problem with the SOEs.
But the first thing that I tell people they need to know is that the whole story is about the consumer, right? The thing that's emerging are the people. There's billions of people, and they're moving on up. They want stuff. They want more and better food, more and better clothing. They want appliances. They want entertainment, vacations, cars, and they want their kids to go to Harvard. That's the story.
And I didn't have to figure this out. It was very well-documented. McKinsey & Company is one of many firms that have published a 100- or 200-page report document this incredible wave, this megatrend.
McKinsey calls it the biggest growth opportunity in the history of capitalism because you've got 85% of the world's people in emerging markets, 90% of the world's people under the age of 30 are in emerging markets, and they want stuff. That really is what people should be focused on is the consumer.
Again, the problem was that you didn't get that. The China ETF was 80% state-owned oil companies and banks and less than 10% in the consumer sector.
And so my battle, if you will, was to reduce the exposure to the state-owned legacy stuff and increase the exposure to the consumer. What I concluded 10, 12 years ago was that investors that wanted to make money should not use a traditional emerging markets ETF, but they should do what I saw happening in the endowment world.
In the first eight years on the China scene, Burton and I launched a number of China ETFs with Guggenheim, but when I wasn't working with the Guggenheim people I spent my time in and around NYC and Boston with a couple dozen family offices and Ivy League endowments.
And I watched how they evolved their approach to emerging markets. There's a concept we call "emerging markets 3.0," and I didn't come up with that name. There's a blogger that wrote a whitepaper about this, and when I saw the whitepaper I knew exactly what he was talking about because I have lived it.
Basically, the Harvards and the Yales of the world were starting with a toe in the water, a small allocation to emerging markets, maybe 3% or 5%. Then they were slowly increasing those allocations to se7%, 8%, 9%. Call that "emerging markets 2.0."
But then eventually they see that they're not making any money, and they see people going to jail, like the last two presidents of Brazil, for stealing their money in the form of corruption at places like Petrobras. And they decide they have to get a little bit more precise in how they invest in emerging markets and not just use a broad approach.
In the case of someone like Yale, what they did is they took one of their young star analysts from the endowment, David Swensen's team, and they seeded him with $50 million to go back to China and pick stocks.
But most people didn't have that luxury. And so what I started to tell people when they asked me, "What's the best emerging markets ETF," I didn't tell them to buy any of the China funds that I made with Guggenheim. I told them to buy the Emerging Markets Consumer ETF, ECON, because that was the ETF whose title matched the story, the Emerging Markets Consumer ETF.
Now I had nothing to do with that fund. I didn't know anybody that worked there. I just knew that it existed with the ticker, ECON, and it owned the 30 largest emerging market consumer stocks. And so that's what I told people to buy.
About eight years ago and seven and a half years ago, I woke up one morning, and I looked in the mirror and I thought, "Oh my God, what have I done with my career?"
I was this young, cocky Charlie Munger-wannabe stock picker, but somehow I got mixed up with this Princeton board member Vanguard professor, and I wake up in the mornings to build Chinese index funds, for God's sake. I've obviously lost my way, and I need to get out of here and get back to my roots.
I told the Guggenheim people I was going to do that, and I did. I set up an investment partnership for myself. And once I had it organized and funded with my own money, I bought five stocks that were all part of this emerging market consumer story.
Then I thought to myself, "Well, I should at least go around town and see if any of my friends want to invest with me in this partnership." And so I scheduled some meetings, and the morning of those meetings I made a few slides to show the people that I was going to be talking with.
One of the slides was a list of the five companies I had invested in. The first three were stocks that were in the Emerging Markets Consumer ETF. Those three were Want Want, which is best thought of as the Nabisco of China, branded crackers and snack foods... The second and third companies also in the Emerging Markets Consumer ETF were Li-Ning and Peak Sports, which you can think of as the Reebok and Converse of China, branded sportswear and basketball shoes. So those were the first three companies, all of them in the Emerging Markets Consumer ETF.
But then I had two other companies that I owned that were clearly part of the emerging market consumer story, but they were not put in the consumer box in a database. They were put in the technology box.
The first company is called Wuba, W-U-B-A, which is the Craigslist of China. It traded on the New York Stock Exchange. It went private last year.
And the fifth and final company, trading on the Nasdaq, is called MercadoLibre, MELI, which is best thought of as the Amazon.com and PayPal of Brazil and Mexico and every other country in Central and South America.
After I made that slide I looked at it, and I thought to myself, "The three consumer stocks I own are great. They're growing at 15% or 20%. I think they have moats, to use a Buffett term, in the form of brand equity. So those are great companies."
But then I looked at the two "technology" companies that were clearly consumer companies, no matter what the database called them, and they were growing at literally 100% and had incredible margins. In the case of Wuba, it had a 94% gross margin, which is where I look for moats.
I just remember thinking the two best companies that I own for this emerging market consumer story aren't even in the Emerging Markets Consumer ETF because of where they're placed in the database. While their P/Es where higher, their P/Es divided by their growth rate, the PEG ratio – which is all I care about. The PEG ratios were actually quite reasonable and lower than the traditional consumer stocks.
And that was it. I had that thought, and I printed my slides and I drove around town and I had three meetings and I got three checks. I was on my way home, and I was stopped at a stoplight. My phone rang, and it was a friend of mine with a three-year-old daughter.
She said, "What's the best emerging markets ETF for my daughter's college fund?" And I started to tell her to buy ECON because that's what I told everybody that asked me that question before.
But then a lightbulb magically appeared above my head, and I said, "Wait a minute. The best emerging markets ETF doesn't exist. It would be the Internet companies."
I drove back to my office, and I started to organize EMQQ that afternoon. It launched 100 days later on November 12, 2014. So that's a long story, but that's how EMQQ came to be.
Dan Ferris: No, it's great. It's great that you had these ideas. I can hear you getting these ideas and then sort of disabusing yourself of the problems. You're like, "Oh, well, maybe that idea isn't perfect, so I've got to pivot over here." And you did that.
Most people are very dogmatic even about the market, which is crazy, of course. You've got to be flexible and find out what's changing. You found out what was changing, and you changed with it. It's actually kind of inspiring, Kevin. You're inspiring us.
Kevin Carter: Wow, those are kind words. I appreciate that. I've gone through my life and career and see ways to "fix" things or make them better. I'm not a prideful person, but I am thrilled with the fact that indeed my friend asked what the best approach would be, and I recognized that it wasn't there or I didn't think it existed and I created it.
And now based on the databases that track the performance of emerging markets products, we are No. 1 by a pretty good stretch. I am optimistic that that will continue over the next five and 10 years as well.
Dan Ferris: And are you talking specifically about the EMQQ ETF?
Kevin Carter: Yes, sir.
Dan Ferris: And that's the ticker, just for listeners?
Kevin Carter: Yes, sir.
Dan Ferris: As I look at the top 10 holdings, I see MercadoLibre in there. Let's see, who else? Well, Tencent and Alibaba look like the top two, if this data is up to –
Kevin Carter: Sure. Let me tell you about what we own, and let me also tell you what I think – how I think people should think about what EMQQ represents. So we own every publicly traded Internet or e-commerce company in any emerging or frontier market.
And we don't care what stock exchange you trade on or what country you're domiciled in. What we care about is where the revenue comes from. And those things don't always match, by the way.
Traditional index people in my experience, they don't ask a lot of questions, and they just sort of take the database as being accurate. But a lot of times the country code or the sector code doesn't always match the income statement, which is a problem.
But we own – there's 96 companies today, and that list is growing. It's more than doubled since we launched. The two biggest of the companies by market cap are Alibaba and Tencent, which collectively are well over $1 trillion of market cap.
But we also own MercadoLibre, which we talked about, which is both the e-commerce and payments leader in Central and South America and also been one of our best-performing companies over the last couple three years, largely as a result of strengthening their financial services, the fintech business, which is the biggest theme within the EMQQ story.
But really we own Jumia, which is a Nigerian e-commerce leader, the "Amazon.com of Africa," which is headquartered in Nigeria. We own Stone, which is a Brazilian fintech company that Berkshire Hathaway actually bought 5% of on the IPO, which is one of my favorite personal holdings.
We own Yandex, which is the Google of Russia and also now the Uber of Russia. Yandex.Taxi beat Uber, and Uber now is a minority stakeholder in Yandex.Taxi.
These are really the same kind of businesses we see in our lives, but these are the localized versions, and it's happening all over the world. Just in the fourth quarter we had – the Amazon.com of Poland is called Allegro. It went public and is now the largest company trading in Warsaw. And even Kazakhstan had its first e-commerce IPO, Kaspi, which is the super app of Kazakhstan.
So this Internet thing's happening all over the world, and I'm quite confident that it is not only the fastest-growing sector in the world today, but in fact the fastest-growing sector in the world ever in terms of revenue.
Dan Ferris: I wonder, did you see this article that popped up on Bloomberg about I think it was like 150 million people have fallen out of the global middle class in the past year.
Kevin Carter: I saw that this morning, and I haven't read it yet, but I'm not surprised by that. There's been lots of carnage in the world for businesses and for people, and so that doesn't surprise me.
I suspect that the emerging market consumer story and the emerging-market middle-class story, that's not going to go away. Obviously it's taken a hit with this. But, yes, I did see that story.
That retrenchment notwithstanding, let me tell you the way to think about EMQQ, which it wasn't as clear to me seven and a half years ago when my friend made that phone call. I saw the growth rates and the valuations being reasonable relative to those growth rates. I saw the margins that were quite good in these companies.
But what I didn't appreciate is that really what EMQQ is, it's a combination of three different themes, three megatrends that are happening in the world at the same time. The first megatrend is the rise of the emerging market consumer, all of these people in the world that are moving on up and want stuff like we have. So that's the first part of the story, well documented.
But when I answered that call seven years ago, I answered it on my iPhone, which was a pretty new thing to me at the time, right? I had an iPhone back in 2014, but I had only had it for a couple years at that point.
It was pretty clear that that device was changing my family's consumption. Back then my family was going to the Target store which is only a few miles from our house. My family would go there four times a week.
But all of a sudden with these smartphones I started to notice that my family was going to the Target store a little less, and there was a truck in front of my house once a week with a package, and then it was twice a week.
Now before the coronavirus came to town, my family had already stopped going to Target except for maybe once a month. Meanwhile, the brown trucks and the white trucks were in front of my house so often that I didn't even have to see them to know what color they were.
So if you think about how the smartphone has changed us and you map it over to where all of the world's people are, emerging markets, then the story gets really big because I had a computer for 20 years before I got a smartphone, but most of the world's never had a computer.
So the second megatrend is called the computer, which most of the world is just getting today for the first time. It's not on their desk, and it never will be. For the most part, it doesn't have an Apple logo on it like mine does.
So all of those billions of people, minus the 150 million that perhaps have gone backwards this year, all of those people in emerging and frontier markets are getting their first-ever computer. It's a $50, $60, $80 Android-based smartphone made in China, and it's bringing with it the third megatrend, which is something that we take for granted as well, something I have had for 25 years, called the Internet.
When I first got the Internet a couple years before I dialed up Burt, I was living in the Marina District of San Francisco, and I got the Internet over a telephone line with a modem. Then it went out on cable, and now it just shows up in my pocket.
Well, the reality is that most of the world was never wired, and so all of these people, when they get that first smartphone are also getting their first Internet access and it's via mobile broadband and Wi-Fi.
And so you combine those three megatrends. We call it the great confluence, which is just a fancy way of calling it a mashup. But you combine those three megatrends at once.
Importantly, because the consumption infrastructure in emerging markets is by definition underdeveloped – and when I say "consumption infrastructure," I'm talking about bank accounts with debit cards in everybody's pocket, I'm talking about televisions on the wall with 1,000 channels, and I'm talking about Target stores.
Because those things don't really exist, all of these billions of people in the developing world are leapfrogging what we think of as traditional consumption and going straight to the cutting edge and becoming consumers as digital natives.
So in many ways, the developing world is ahead of us in these things, which is sort of a paradox because you would think someone like me, a fintech entrepreneur in the San Francisco Bay Area, you would think I would be the person that would walk around with my phone zapping it to pay for things, right?
But it's not me. It's people in the developing world. Kenya's mobile payments markets is twice as big as their GDP. The continent of Africa represents I believe more than half of the world's mobile payments users again as they leapfrog what we think of as traditional consumption and bank accounts and so forth.
Dan Ferris: I knew about this, but saying it loud like that, that's really powerful to think that this much – it's a huge population of people we're talking about is ahead of us technologically even though they're poor. Let me just say it like it is. They're poor, and yet they're going to skip over all of what these days is expensive infrastructure and go straight to the cutting edge.
That's a really powerful thing for an investor because those other businesses, the one's they're skipping over are generally higher-capex and lower-return-type businesses that make those products that they're skipping over, right? And the ones that provide the cutting edge are higher-return, lower-capex.
So that's really cool. That makes me care a lot less about what happened to those 150 million due to the COVID situation.
I have to be a good host. I can't let you off too easy. So what about valuations around emerging markets? Every now and then I like to go over to GMO, Jeremy Grantham's firm, and they do these forecasts, right? It sounds like you know where I'm going.
And their seven-year forecast, the latest one, and the last few, they forecast 11 different markets in stocks and bonds, and they're all negative. Negative annualized returns they're forecasting for the next seven years, and that's largely based on trend and valuation.
And the emerging stocks they're forecasting negative 2% a year, but emerging value is the one bright spot, the one positive forecast on the whole thing, at about 3.3% annualized.
How do you feel about that? How do you feel about valuations at about 3.3% annualized. How do you feel about that? How do you feel about valuations and trend and things like that right now? Because it's kind of an expensive moment in the world of stocks and bonds generally around the globe.
Kevin Carter: Well, let me say a couple things. First of all, I have never met Jeremy Grantham, but Burton always – whenever Jeremy Grantham comes back, Burton says every time Jeremy talks, he feels like he should go stock up on canned food.
In terms of quantitative people, I don't love quantitative investing. That's a very nice way of putting it. People that try to apply a quantitative analysis to emerging markets, I think they completely miss it because emerging markets, if you use an optimizer or otherwise screen for value in emerging markets, that's a great way to find frauds and SOEs, right?
Those things look really cheap. As I said earlier, this is why I think emerging markets are the biggest value trap.
In terms of valuations for this group and just broadly, obviously there's a lot of things going on in the investment world these days that certainly I understand why they spark concern with people, whether that's the SPACs or the Robinhood/Reddit/GameStop situation. There's a lot of things going on that I think have people scratching their heads about where this is all going.
But I'm a pretty simple person, and I look at – there's only one number that I really care about, and that's the PEG ratio. What's the P/E, and what's the growth rate? Look, I'm a value investor, but the P/E without the G means nothing to me.
I have no opinion if you tell me the P/E of something without me knowing what the growth rate is. Because I'm buying the future earnings, I want to know what the slope of the curve is.
And while Peter Lynch popularized the P/E versus the earnings growth rate, I actually like to use the revenue growth rate because I think that's a more pure form of growth. You could be a company whose revenue is shriveling up and grow your earnings by buybacks and so forth. So I look at the P/E over the revenue growth.
Right now the P/E for our group, for the EMQQ index, the P/E is in the high 30s, and the revenue growth projections for this year are over 35%. So if I put a 38 and divide it by 35, I get a PEG ratio that's just a little bit over one.
Now the U.S. tech leaders, the FAANG stocks, they have a similar P/E, but less than half of the growth rate. So the U.S. tech stocks, as measured by the FAANG stocks, they're more than twice as expensive on a PEG ratio basis. The S&P 500 might have a PEG ratio of five right now, so five times as expensive on a PEG ratio basis as these companies.
And then the other thing to measure against is what's the risk-free rate. I know interest rates have gone up, and so maybe the risk-free rate isn't zero anymore, but it's still pretty close to zero.
So when I compare the valuation of these companies to the alternatives and also just on an absolute basis I think they're quite reasonable. If you have a three- or five-year timeframe, and hopefully longer, I think you'll do very well with these companies even after a pretty strong last 12 months.
Dan Ferris: OK, good answer. I like that. Much more nuanced than just throwing a projection out there based on trend and P/E.
I keep hearing about this talk that you want people to listen to, "The Future Of Emerging Markets And The Digital Consumer Revolution." Where can I hear that? I assume that I'm just going to hear a lot of the themes that you have discussed today, right?
Kevin Carter: It's a presentation that I give to professional investor groups. I've done it for probably close to 80 CFA societies around the world now and hundreds of other groups. It basically tells the story that I have just told you, but with a lot more pictures and charts and statistics and so forth.
But we give it on a regular basis in the form of webinars. So I think the best way to catch one of our webinars is to reach out to us and learn when our next ones are or schedule one for yourself or your own group. We're happy to do individual presentations or small group presentations to investors that are interested.
Dan Ferris: And where can our listeners – if somebody wants to reach out to you, is there emqq.com or someplace to go?
Kevin Carter: emqqetf.com, and there's a contact button on there, I'm sure.
Dan Ferris: All right. We've been actually talking for quite a while, but I do have one more question for you.
Kevin Carter: Yes, sir.
Dan Ferris: It's the same final question that I ask every guest I interview on the program. I'll tell you the breadth of answers is getting really interesting. Some of them take 10 minutes, and some of them take 10 seconds. So the question is simply: If you could leave our listeners with a single thought today, what would it be?
Kevin Carter: Well, I guess what I would say is this. I obviously am in a position where I'm potentially biased about things, but I think I'm pretty good about being intellectually honest about things.
I would say that one of the bigger thoughts that I've had that's evolving in my head over the last year is a sort of radicalization and rebellion to some of the traditional approaches to things and in particular asset allocation and modern portfolio theory, which I am now rejecting largely.
People ask me, "OK, I see that this is a big growth story. Maybe the valuations are OK. How much should I invest in this or how do I use this as part of my emerging markets allocation?"
I think that anybody that wants growth, anybody that has a five- or 10-year and hopefully a 20-year or longer timeframe – and my average age of my four colleagues is 32 or 33. But thinking about their investment outcomes is largely part of what's made me rebel to these things.
But I think that anybody that really wants growth, I think that this sector, this emerging markets Internet sector, it's the tip of the spear of where global growth is.
I think that if you have a long-term perspective and the stomach for volatility along the way and an appreciation for the miracle of compounding, I think investors that buy and hold and continue to buy and hold these companies as a group or some of the individual names, I think they'll look back 20 years from now and be quite happy they did.
Dan Ferris: I hear shades of Warren Buffett in there, right? Just find great businesses whose earnings you think are going to be a lot higher five or 10 years from now, and he usually says 10 years I think when he's saying this. Just hang onto them, and don't worry about the daily price fluctuations.
Kevin Carter: If I could redo my own investment life, there's lots of things – by far my biggest mistake was selling things.
Dan Ferris: Yeah, me, too. I've been way too active, I guess you could say.
Kevin Carter: Indeed.
Dan Ferris: Well, thanks, Kevin. I appreciate that final thought, and I find EMQQ very interesting just as we talk about it and as I look at the holdings while we're talking and hear you talk about the philosophy of it, and all the things you had to change your mind about over the years to get to it is really cool, too. That is something I hope our listeners will take away from this.
Kevin Carter: I'll send you my research notes from 22 years ago when I made the case for shorting Amazon.com with a $1 billion market cap.
Dan Ferris: I would love it. I'd love to see that. That's great. Well, listen, we'd love to have you back sometime, we really would.
Kevin Carter: Well, I'd love to be back, so let us know, and we'll do it again.
Dan Ferris: Thanks a lot.
Kevin Carter: All right, thank you.
Dan Ferris: I don't know about you, but that just makes me want to buy EMQQ and just kind of forget that I own it for 10 years. It's really neat. And I hope you heard me say two or three times it's really amazing that he told us his learning process. He changed his mind. He wasn't dogmatic about this stuff, which is really cool. OK, great interview. Really enjoyed it.
Normally it would be time for the mailbag, but I've got to tell you the mailbag was really light this week. There was just nothing in there that really grabbed me and made me want to respond.
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So that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. Listen, we provide a transcript for every episode, but sometimes it takes a little bit of time to get it done. Just go to www.investorhour.com, click on the episode you want, and scroll all the way down and click on the word "Transcript."
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