Transcript of Ruin the Bell Curve with Tony Sagami

To view our most recent Wealth & Wisdom video, click here. For the transcript, edited for clarity, read on ...

Kenny Polcari: Good morning. I am Kenny Polcari and thank you again for tuning into this piece of exclusive content for our Weiss Partners Circle Members. Today, we're going to be talking to none other than Tony Sagami. If you know who Tony is, you love him, and if you don't know who Tony is, you're going to fall in love with him. Today, he is going to share with us some of his exclusive tips that you won't get anywhere else.

Tony, good morning and thank you so much for joining me.

Tony: Hello, Kenny. I see some palm trees over your shoulder.

Kenny: Yes, you do. I am in beautiful Boca Raton, Florida. The weather is gorgeous, it's great. Tony is one of the early pioneers in the application of the technical and quantitative analysis for both mutual funds and stocks and ETFs. His four decades of investing experience serve him very well at Weiss Ratings, where he writes and edits and he's the founder of Weiss Ultimate Portfolio, as well as Disruptors & Dominators, which is what we're going to talk about today. It's absolutely one of the key places to look for investors in this nervous, anxious environment.

Tony: Exactly.

Kenny: Tell our subscribers a little bit about what makes Disruptors & Dominators tick and then how you use the Weiss Ratings system to help you find and assess names in that space?

Tony: I'm pretty analytical at heart. I was that kid who sat in the very first row of math class.

Straight A's screwed up the bell curve for everybody else. I had kids throw spit wads at the back of my head, but that math and science focus led me to start my own software company. In the early '90s, I had a software company called Manhattan Analytics, and its job was to analyze momentum in a quantitative method for mutual funds and stocks.

A lot of people are using technical analysis, but not really computerized investing. I was doing it in the early 1990s, so I was the first one to apply it to mutual funds and then the ETFs. I could standardize momentum because we're looking for things that are moving and hot and going up while some things are going down, and … software focus took the guesswork out of finding what the strongest momentum patterns were. That was a genesis of my investment career and it's been wildly successful.

Kenny: Could you explain the concept of momentum because I think it's very, very important in this conversation?

Tony: If you look at any chart of ETFs or any stock, you see a bunch of squiggles going up and down, and it may be sloping upwards, but there's certainly lots of valleys in there. With computerized investing and algorithms, I can quantify the strength of that momentum and its persistency and I factor volatility into it. I'm looking for strong, risk-adjusted performance, and the ones that have that highest amount of performance divided by volatility is what I think is the sweet spot of investing, and that's what computerized investing helps me do.

Kenny: Does Weiss Ratings offer that ability or is that something that our subscribers get because they subscribe to you?

Tony: Weiss has two types of ratings: One, which I helped create with Martin — the Weiss Performance Ratings — goes back to that momentum and performance. But we also have the Weiss Safety Ratings where we look to things like balance sheet, debt and equity ratios and all those fundamental things that they taught us in MBA school. So, that combination of Weiss Safety Ratings and Weiss Performance Ratings is our secret sauce.

Kenny: Let's talk about the two portfolios. The first one is the Weiss Ultimate Portfolio. Could you briefly tell us what that portfolio is?

Tony: The other rating services like Standard & Poor's, Moody's and AM Best give almost everybody an "A." Weiss Safety Ratings is just like we're back in school — you get an "A," "B," "C," "D" or "F" [rating], and it's graded on a bell curve. Only the top 10% get the "A's," the next 20% gets the "B's." In the Weiss Ultimate Portfolio, we don't invest in anything that does not have a "B" rating or higher. That doesn't mean it's a terrible company, it just means it has less-than-pristine balance sheet and financial and fundamentals.

Kenny: How often do ratings change on these "A-" and "B"-rating companies? Not very often, I would imagine.

Tony: Not very often. It's tough to get in and it's also tough to get out because … companies are responsible financially, stay responsible. The opposite is true, too.

We've always considered debt to be a dangerous tool, very useful for people who know how to use it and assuming that the economy stays strong, but debt can kill you when things go bad.

My father used to say, "A little bit of debt never hurt anybody, but a lot kills everybody." That's the reason why the balance sheets are so important to the Weiss Safety Ratings.

Kenny: I think that's such a great point that people need to understand. Here's another question because you said it's difficult to get in: If you're a "C" or a "C+"-rated company, there's obviously a better chance because you're moving in the right direction to get into the "B" rating, but how often? Are they quarterly adjustments? Could they be weekly? Are they at the end of every earning season? When do those adjustments happen?

Tony: The big one is once a quarter when they turn in their 10Qs and the quarterly statements. That's most of the data, but in between there's a lot of announcements that can happen. They might do dead issuance in the middle of the quarter or have a terrible pre-announcement of profit warning. Generally, they're adjusted once a quarter, but they can be adjusted at any time, and we do monitor weekly.

Kenny: That's why clients and subscribers to the Weiss Ratings system should also monitor their portfolio. I do it every week, but that's just because I'm anal. I think subscribers should do it at least a couple of times to make sure that nothing's really changed.

Tony: It's pretty easy, too: Just go to weissratings.com, type in any ticker symbol of a stock, ETF or fund that you own, and you can pull it up in seconds.

Kenny: Let's talk about something very specific in Disruptors & Dominators and the cybersecurity space. It is an area of focus recently because of this Russia-Ukraine war and Russians attacking Ukrainian sites. People need to understand the future of online security when it comes to financials, news, information. So, let's talk about one of your best picks and why you feel so strongly about it.

Tony: Cybersecurity is an important part of the global economy now, and that's something you can't skimp on if you're a corporation or a government.

For example, let's take a look at the cybersecurity market: This shows how it's been growing, but now it's really starting to escalate.

Sean Brodrick, one of our other editors, forecasts that it's going to hit almost half a trillion by 2025. He expects it to double in the next three years, and I think it might be a little conservative. For example, Biden just approved another extra $11 billion in homeland security.

If you include corporations and military, it jumps up to well over $200 billion, so we're talking about a big pie. And when you start throwing around billions, someone is going to make a lot of money, and it should be you.

Kenny: Let me ask you a question because here's just something that I'm always curious about and subscribers might be as well. Should individuals rest assured that their financial institution, Bank of America (BAC) or Citibank or JPMorgan (JPM), is protecting them? Do they need to take protection in terms of cybersecurity in their own hands?

Tony: There's a lot of different cybersecurity services you can subscribe to.

I subscribe to one called LifeLock, but I also have a program downloaded on my hardware that will protect most of it. But the biggest problem is that you get malware and these funky emails that sound authentic.

They are coming from a very important institution that you know and trust, but they unleash viruses in your computer.

And that's why you need outside services to protect you. Because they monitor whatever the latest craze among cybercrooks is, and they download firewalls to prevent them from getting to you. If Hillary Clinton had downloaded a firewall into her home server, she might've been president today.

Kenny: I hear you. So, let's talk about one of your favorite names in the space.

Tony: There are several ETFs that you can do. But the problem with the ETFs and a wide variety of cyber stocks is that cybersecurity has dramatically changed since the onset of COVID-19. because so many of us are working at home these days.

When you work at home, that's an extra laptop and an extra mobile phone that has access to your corporate site. That's another entry point for the cyber scumbags to enter your home and your company's firewalls. The old cybersecurity stocks focused on protecting the servers at your home office, but the new threat is coming through the cloud and your mobile phone.

The most important cybersecurity is cloud cybersecurity, and one company, CrowdStrike (CRWD), has nailed it.

Kenny: Tell us about it because it was one of your latest picks and it's been acting beautifully.

Tony: It's an early mover on providing cloud cybersecurity. All corporations are moving their databases and client servers to the cloud; that's all we talk about these days. The cloud is growing like mad.

Look at Microsoft (MSFT), Amazon (AMZN)'s Amazon Web Services (AWS) and Alphabet (GOOGL): Their products are being driven by their cloud security services. All that data in the cloud has to be protected against the cyber scumbags, and CrowdStrike is leaps and bounds above the rest of the competition. So, that's the best part of the cybersecurity food chain to invest in.

Kenny: CrowdStrike sold off from mid-April until mid-May, when you recommended it, about 43%. The stock is up 34% since that recommendation, has acted very well and continues to look beautiful on the chart.

Tony: That's the beauty of Disruptors & Dominators.

Dominators are established blue-chip companies that aren't going anywhere, and they make more money year after year. I think you need to have a large part of your portfolio in dominators because they are the ones that hold up the best during times like this.

On the other hand, the disruptors like CrowdStrike got hit pretty hard. And that's true for all these disruptive technology stocks.

The disruptors are so cheap, it's time for you to look at them, now when they're at a discount. "You buy your straw hats in January." That's another thing my father used to say.

Kenny: Right.

Tony: The Kmart blue light special, I love bargains. I could afford a Rolex, but I wear a Timex. I drive a pickup. And I shop at Walmart (WMT) and Costco (COST), I'm a cheapskate at heart, but I'm also a chicken. And when the prices get beaten down, as much as they have, it's time for your inner chicken to be released and start looking at discount disruptors.

Kenny: I think you're absolutely right when you talk about broad, long-term investing. We're at the point where we're starting to see a lot of these names show up as bargain. I always laugh because when we talk about how the market reacts, when Bloomingdale's has a sale and they put clothes on 30% sale, people go rushing in to take everything off the rack. They can't leave it there. Oh my God, it's down 30%! But then you talk about stocks with real, long-term potential that selloff 30% or 40%. People go, "Oh my God, I got to get out." when they should have a completely opposite reaction.

Tony: Exactly.

Kenny: And CrowdStrike is a perfect example of that. The stock sold off 43% a month from April to May. You looked at your Weiss Ratings, did your analysis and recommended it. Now, it's up 35%. The market has recovered a bit, which certainly helps. But you identified it using your special sauce. And I think subscribers who have paid attention to you are well rewarded as a result.

Tony: Let's pull up this chart about Software-as-a-Service (SaaS) model. CrowdStrike now sells its cybersecurity as a subscription-based model, which amounts to a regular, recurring, guaranteed revenue that keeps on pouring in year after year.

A lot of software companies, Microsoft included, sell their services as an ongoing subscription.

Remember the old days with the Microsoft Office when we had to buy those pesky upgrades. They were such a pain in the butt. Not only did you have to pay money, they were also difficult to download. Now because of 5G, faster download speeds and the cloud, they download all these updates to you automatically, you don't have to do anything.

That's really the beauty of the Software-as-a-Service.

Let's take a look at the next chart, which shows how that software service turns out in the recurring revenues. CrowdStrike calls it ARR, Annual Recurring Revenue, which is just their terminology. Take a look at how its revenues are growing.

The red ones are the new customers that are coming aboard, and the gray ones are the existing customers that sign up. Once you add a new one, it just keeps on growing. It's growing consistently at 67% annualized rate. 67% growth in annual revenues in the door. That's a business model you can bank on.

Kenny: Tony, thanks so much for your time and insight today. It's always such a pleasure to talk to you. I love the way you work the numbers and use the Weiss Ratings to come up with fantastic ideas for our subscribers. Tony is one of the early pioneers in the application of technical quantitative analysis at Weiss Ratings And he's the editor of the Weiss Ultimate Portfolio, as well as Disruptors & Dominators and the stock and ETF trade options trading portfolio. Tony, tell me the name of the option one?

Tony: Stock Options Hotline. That's my most speculative service, designed for big, grand-slam home runs, options but extremely rewarding if you hit them right.

Kenny: And the Weiss Ultimate Portfolio is based on much more of a long-term portfolio for investors who are looking to establish a long-term plan. It's not necessarily trying to identify the hottest, latest stock, it's much more of a long-term portfolio.

Tony: Yeah, it's really geared more toward retirement accounts, IRA (individual retirement account).

Kenny: And then we have Disruptors & Dominators, which is such a great editorial piece because it talks about exactly that — disruptor names and dominators in the space. Tony, tell us just a little bit about that, and explain to the listeners why this is such an important piece.

Tony: Yeah. Investing is a lot about emotion, as well as making money. You have to be able to sleep well at night, especially during trying times like this. The best way to keep a long-term plan in place is to invest in a combination of dominant, profitable blue-chip companies, the dominators of their industry. The companies that make money year in, year out, that aren't going anywhere.

On the other hand, you also want to go for some big gusto growth. And those are the disruptors, the ones with exciting new technology or new proprietary business planet systems that really help them grow and disrupt their industry and make tons of money. So, I take a barbell of both, some disruptors and some dominators.

Kenny: I think that makes perfect sense. But let me ask you a question: Are the disruptor names that you're talking about all in that Cathie Wood universe?

Tony: No way. Let me give you an example. There's a company called Copart (CPRT), and they've put in junkyard inventory on a national database. There's nothing high tech about junkyards, but their application of this new, cloud-based inventory of all the junkyards in the U.S. — not all, but many — is really revolutionary.

And it's made it easier to get used parts, and it's also made the value of used cars go up because people are ready to buy parts when they can get their hands on them.

Kenny: Tell me what's the symbol for that again?

Tony: CPRT, Copart.

Kenny: I'm looking it up right now because I've never heard of it. I just want to take a look at it really quick on the chart. Wow. It's a $117 stock.

Not bad for a junkyard stock. And it's had an interesting ride, I will say. But ever since the market's been under pressure this year, the stock is down about 28% off its high back in November. It's actually held up pretty well, considering the difficulty that the market's been through. What an amazing idea, Copart. I had no idea that stock even existed.

Tony: Yeah. You don't have to be in a whizbang tech stock to be a disruptor. Costco (COST) was a disruptor, wasn't it?

Kenny: Amazon (AMZN) was a disruptor.

Tony: FedEx (FDX). If I really do my job right, today's disruptors become tomorrow's dominators.

Kenny: Amazon, who was a disruptor 15 years ago, is now the blue chip in that space. Today, it actually split 20-for-1, and it's $127 stock now, so it's much more affordable for people.

Tony: Yes, but that's just an example of how you don't have to be a whizbang tech stock to be a disruptive, high-growth stock.

Now, some of them happen to be like that. For example, we were talking about cybersecurity a little earlier. Those are very disruptive stocks, but also very volatile. It's an area that we should take a look at, but you don't have to invest. There's a lot of ETFs that invest in cybersecurity stocks, too.

Kenny: Give me the examples, an ETF like CIBR, which is the First Trust?

Tony: That's the biggest one, with almost 6 billion in assets. And that's really important when you're looking at more thinly traded tech stocks, but this one owns a lot of cybersecurity stocks that we talk about all the time. The problem with the big basket of cybersecurity stocks is that in the old days, cybersecurity was really focused on protecting the servers that were domiciled in the home offices. That's where cybersecurity threats used to be.

Now, since COVID-19 and working at home and the home offices, we have millions of new entry points for cyber scumbags to get in. It's your laptop at home or your company mobile phone, smartphone that they gave you. So, the cyber scumbags are starting to get in there. When you're looking at cybersecurity today, the cloud-based cybersecurity is really the sweet spot of the cybersecurity industry.

Kenny: When we talk about the cybersecurity ETFs, CIBR for example, you have names like Palo Alto Networks (PANW), CrowdStrike (CRWD), Cisco (CSCO), VMware (VMW), Booz Allen Hamilton (BAH). These are all names within that ETF, right?

Tony: Yes. Everyone you named, except one, is concentrated on the home office server security.

Kenny: Which is very important.

Tony: Absolutely. But I think it's not the best part of the cybersecurity food chain to invest in. But that's the purpose of ETFs, to give you a wide array of different options, like the mutual funds of the old days.

Kenny: Right. Dominators and Disruptors in this case is going to identify specific individual names within the space. Yes, you could play cybersecurity using an ETF like HACK or CIBR, but if you really want the bang for your buck, in an editorial piece Disruptors and Dominators, you identify within that space, names that individuals should be looking at.

Tony: Yeah, and this is a little off target, but still applicable to ETFs: Every once in a while, once every three, four, five years, ETFs pay out big capital gain distributions.

Function of capital inflows. If there's a lot of redemptions, they have to start selling stock, and that triggers capital gains. Maybe you didn't sell, but the people inside the ETF did, and so you get hit with a capital gain. That's why I like the control that the individual stocks give me on top of getting into the best part of the food chain of every particular sector.

Kenny: And Dominators and Disruptors identifies the parts that you should be in, the dominators in this space and the companies that are coming up to disrupt the space.

Tony: Yeah. And maybe it's me, individual stocks are more fun.

Kenny: I agree with you. How long has Dominators and Disruptors been alive?

Tony: Oh gosh, since 2007 or '08.

Kenny: And it was your baby? You're the one that brought this idea to the Weiss Ratings?

Tony: I was really looking for a way to combine blue chips with high-growth stocks in a coherent manner. In the old days, if you wanted growth and safety, it used to be a lot of those growth in income funds, equity income funds. And those are really high-dividend stocks, but they really didn't capture the growth that I wanted. So, instead of going with some hybrid, boring dividend stock, I wanted the big, high-growth disruptors along with the safety of blue-chip disruptors. That's why I proposed that to Martin, and he said, "Hey, that's a great idea. Let's do it."

Kenny: Just to be clear, there is room for all of this in the investing world space because there are clients and subscribers who want the safety of high-dividend, big market-cap, very stable names, and other subscribers who want the bang for their buck. They're looking for the next big one, and they want it to be identified by individual names, versus an ETF to your point, because they have more control.

Tony: Yeah. My experience and education are all geared toward tech stocks. That's what I know the best and I'm most comfortable with. But talking about 2001/2002or the 2008/2009 financial crisis, the people that got nothing but tax stocks got hammered so bad, it scared them out of the stock market forever. Everybody loves volatility to the upside.

Nobody likes volatility to the downside. And that's a problem with a pure tech portfolio. Your downside volatility is really painful.

Kenny: If people that play in the tech space don't understand that by now, they need to do some homework because with that risk comes reward.

Tony: Yeah, just like Mike Tyson said, "Everybody has a plan until they get punched in the face."

Kenny: And the tech names have gotten punched in the face recently, for sure.

Tony: And even maybe a little lower, below the belt.

Kenny: Tony, I love you. Year to date, NASDAQ is down 22%, by far the worst performer out of all the indexes. Right behind that would be the Russell, down 16%. That speaks directly to the volatility in that tech space, but also in that disruptor tech space because to your point, the disruptors are the ones that have all the risk, but they also have so much of the reward.

Tony: That's true, those dominators are really providing the cushion. When you talk about dominators, it doesn't have to be boring things like General Electric (GE). There's a lot of dominators that are doing fantastically well despite the market to share. Albemarle (ALB), the largest lithium producer in the world; Allegheny Technology (ATI), the largest titanium producer in the world; Cameco (CCJ), the largest uranium producer in the world. Those stocks are up, not down. And they're doing fantastic. It doesn't have to be a boring blue chip. We've purposely overweighted with hard assets and natural resources, which are doing fantastic in this inflationary environment that we're in. Dominators are not boring stocks, and they can be extremely profitable.

Kenny: If somebody wants to learn more about Disruptors & Dominators, they can find it on the Weiss Ratings website, weissratings.com. They can certainly subscribe and learn more about your insight, which I think is amazing because I like your style, I like your presentation, so it always makes it for an interesting read.

Tony: Disruptors & Dominators is our low-priced entry service. It's less than $100, so people can give it a try, it comes with a money-back guarantee. If for any reason you don't like it, you get a full refund, no questions asked. But I think you'll be very impressed with the results. It's done pretty darn well.

Kenny: I have to echo your comments. I think anybody that who subscribes to Disruptors & Dominators will be more than pleasantly surprised. Like I said, A, it's interesting read, B, you identify names that are changing the world, and people who want that exposure need this service.

Anyway, Tony, thanks so much for your time. It's been great talking to you. I look forward to doing this again with you, in probably the next month or so because I'd like to circle back around with you and talk about names that you've identified and chosen over the next month, and how they've performed. And like I said, people should take a look and they'll see.

Tony: Let's do it again. Thanks, Kenny.

Kenny: Thanks so much.

Until next time,

The Weiss Ratings Team

About the Editor

A professional trader since 1981, Kenny began his career with a decade as a trader on the floor of the New York Stock Exchange, ran a division of a major Wall Street bank, and built the U.S. equities business at one of the world’s largest broker dealers. 

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