Transcript
Hello and welcome to The Download. I'm your host, Dave Richardson. And it is a windy wintery Stu’s Days. I'm in Winnipeg, and we are about to get about a foot of snow dumped on us. I've already changed my flight because I got to get to Saskatoon, where they've already had, I think, eleven feet of snow today. How's it back in Toronto? Any snow yet?
No snow here. Windy and rainy. Not as cold, so we're not getting the snow.
It seems like you've got a bit of a tan.
It's probably just stress.
I guess that's what we're going to talk a little bit about today. But I just want to remind everyone from previous podcast, if you're a new listener, and I know there's many of you, please subscribe to the podcast wherever you get it. Give us a review and a rating. We always like that. My mom and Stu's mom are constantly putting in five-star reviews. They probably put in a 4.9 or something just to keep us in line. And then if you've been listening for a while, you know that the one way you can't tell if it's snowing is to look at Stu's driveway because he's out sweeping it clean the minute the flakes start falling. So no leaves on Stu's property, no weeds, and no snow on the driveway or sidewalk because you're a very considerate neighbor.
Yes, that's right, Dave.
So, Stu, both of us spent the weekend in the US. Before we start the podcast, we're always talking, and we've got our beloved producer Nancy. She pokes in sometimes with a comment here and there. She thinks of herself as the every person. Our experience in the US was similar because it just seems like it is booming despite what everyone says. It's expensive. There's activity, restaurants, everything. I was in Chicago. Where were you?
I was in New York. Yeah, it feels like the tale of two stories. We've talked about before, interest rates have not impacted the consumer the same way because they have 30-year mortgages, and a lot of it is at very low rates. So they're not fazed by that. Wages in general have been improving. Things are expensive, but I guess there's enough wage to pay for it. At least there's enough across lots of people. And there's a real level of enthusiasm that you can feel when you're there. It's very different than what we're feeling in some pockets of Canada, I think.
That's what Nancy was saying. We were talking about our time in the US, and she was talking about her time in Canada over the weekend, and she just didn't feel that amongst her friends and family and people she's talking to. I look at what investors are doing in Canada, and we still see an enormous number of investors buying guaranteed investment certificates. There's nothing wrong with a guaranteed investment certificate, but you're in the face of pretty good markets. Interest rates are going down. This is normally a time when you see a little bit more investor enthusiasm. But I guess it may just be the contrast between the two that seems so stark relative to the way it normally is.
Yeah, I think that's true. In the United States, when you look at the participation amongst retail investors, it's quite buoyant. It is in a handful of names that are very active, and they trade a lot. One of the companies I saw was an online broker at one of the conferences that I was at, and they had added the ability to trade the election contract. And they opened something like 500,000 accounts to trade this election derivative. So the animal spirits feel stronger there. They feel stronger. When you look through the capital markets, there's been a few more IPOs than we've had. There's a real sense of M&A to come. There's a lot of private credit, which is not quite as dominant in the business community in Canada, but there's a lot of capital out there that's looking for a home at higher returns. Whether or not that will prove to be a bit of a peak in sentiment, time will tell. We talked about some of the indicators that we watch for, and we can get into that, but between data centers, between alternative asset management, there's some big trends that people are still pretty excited about. And the valuations reflect a fair amount of growth to come from them, but the growth also does look a little bit more visible than some of the things that we're seeing in Canada. I think in Canada, there's a bit more of a malaise around. Even if I'm in business, should I be investing? Am I going to get a return? What is trade going to look like? There are all sorts of things that maybe are affecting Canadians, let alone what we've just been through with now falling interest rates, but rising interest rates. You had your house value. It's not accelerating the way that it used to. You have a shock where it's manageable. You can still pay the mortgage and what have you. But just that remembrance of saying, I didn't really think rates were going to rise like that. And once I've seen something once, it sticks in the back of my head for a while about, could I see it again? Those are just some of the differences that we're seeing out there. And that's reflected in valuation. Canadian stocks are cheaper. So these things all find their way through to markets and sentiment.
Yeah, the descriptor you use, which is animal spirits, which is just that appetite for risk, the enthusiasm around what's happening. Again, in terms of putting dollars out. If I'm an individual investing in a certain way, if I'm a company investing for the future growth of my business, understanding that I've got to invest to grow later on. Canada just seems to be in a completely different place psychologically than where the US is. I just can't remember a time when it's felt this different between the two places.
Yeah, I agree with that. It has been some time. And Canadians have been able to invest in US stocks, and the Canadian dollar has been declining, which has been accelerating your returns. So even amongst Canadians, where there has been some enthusiasm, it's normally been for US stocks. And we've talked in the past, is there room for a big rotation? And the ingredients for that rotation don't exist quite the same way they did back in the early 2000s. Business to business, you see not dissimilar valuations in Canada than the United States. We don't have as large a tech sector. We had Shopify reporting last week, and they were strong numbers, and the share price reacted the way you see some of these American stocks react. But we don't have the breadth of some of those companies and that exposures that we find in the United States. And that's why you see portfolios filled with more US companies than you have in the past.
US companies and GIC seem to be the Canadian portfolio. But, Stu, I know you're a big Buffett fan, but the old line «be fearful when others are greedy and greedy when others are fearful». And so many other indicators, too. Valuations, particularly concentrated valuations. It starts to get me concerned when I look at it. Again, when all of the enthusiasm is in one direction. And you mentioned you do have measures that you look at. What are they saying to you?
Well, there's a couple of things that we look at. The first would be how our economic indicator is doing relative to expectations. How is sentiment? How is volatility? How are credit spreads? Those are four things that are pretty good to look at. And about a couple of months ago, economic data started to do better than expectations. So that was a positive. Sentiment has been elevated, although concentrated in a handful of names. Volatility has been low. Credit spreads, very low. Those four things certainly suggest some degree of optimism at this juncture. So we would watch for a shifting in the sands on that one. It's often more than one that changes when you get a trend change. We've had volatility spike a few times, but credit spreads never really indicated any type of concern. And in fact, credit spreads are the lifeblood of the economy. That's a reflection of, can I borrow money and at what rate? When credit spreads are benign, money is flowing through the economy. So the volatility spikes have been brief and put back in the bottle in a relatively short period of time. So we're left with a situation right now where valuations are certainly elevated relative to history. Business in the United States is quite profitable relative to history as well. But it'd be one thing if we were paying an average valuation on elevated profitability. We are paying an elevated valuation on potentially elevated profitability. Time will tell. But the great benefits of so many companies where the cost of goods sold has gone down because your businesses are capital light and your cost of distribution through the Internet has been very low as well. So margins have been expanding, rates have been low, taxes have been low, a bunch of other things contributing to it. So we're left with earnings estimates that are pretty robust, but they're on further margin expansion. So we're going to have to watch estimate revision very carefully as 2025 unfolds. Because we're then paying 22-ish times earnings for those earnings. And when you pay an elevated multiple and the earnings are potentially elevated to trend, there's some sources of risk there. And then you marry that together with four sentiment indicators, which are pretty benign, then all of that doesn't portray or portend anything really negative, but there's some ingredients in there that you have to worry about. You go look at other markets, and you can always find stocks. There's always a bull market somewhere. But even when we go compare that in general to a bunch of Canadian stocks where we don't have as high valuations, we've got good dividends, we've got mid-single-digit dividend growth, you're the turtle and the hare. But just because there's a malaise, and how people are thinking about Canada right now, it doesn't mean that there's not good abilities to compound capital at reasonable rates. I think the difference is Canadian stocks are at a valuation where you can ride out any ups and downs in the earnings front versus American stocks that are a little bit in that range where, if there's any movement on estimates, the stocks are going to be adjusted faster. It's interesting this year, you can look through a bunch of what they call factors. So traditional factors might be value, growth, momentum. Value is a factor in and of itself. And this year, you can look at some factors. And the one that's been really powerful has been estimate revision. One month to three-month estimate revision. And you can almost see it in the stock market in the last month when if someone reported and their numbers were going up by just a small amount, the upside in the stock seemed almost unbelievable. 10, 12, 15%. Last week, Shopify went up 25% on a very small increment to its margin. A good quarter. I don't want to take anything from them. We've seen the same thing where estimates would drop by just a very small amount, and the reaction would be the reverse of significance. And the reason that we watch all this is because, quite often when a factor starts to do quite well, people grab onto that, and it perpetuates itself. So as soon as someone reports, if there's a likelihood the numbers are going up, you get an outsized upwards movement. If there's a likelihood the numbers are going down, you get an outsized downward movement. Has the longer-term valuation of the business actually been adjusted by those percentage moves? Maybe not as likely, but that's the market we're in. We're always trying to figure out what things are worth and how we're going to make money over the longer period of time. But we're also in a market where people are thinking about how things will trade. And that has to do with estimate revision and valuation that might be consistent with what we've had now, but maybe will not be the full measure. You mentioned Buffett, and he's got so many great lines: in the short term, the stock market is a voting mechanism, and in the long term, it's a weighing mechanism. So we'll see how it all plays out.
Yeah, and such an important point to focus on the long term. We're talking here about some of the short-term factors around valuation and enthusiasm or sentiment. That doesn't take away the idea that longer term you want to be in stocks. You need to be in stocks. It's just not to get too excited and not to get too concentrated in terms of where you're placing your money right now. I think the other thing that's obviously post-election is we've had what some people are calling a Trump bump or a Trump trade, whatever it might be. And it's just further pushing the money all in one direction. Because you've had strength in the US dollar. You've had much higher appetite for risk. You've seen gold come down and interest rates up, which has been tough for Canada as well. It's been a real mixed bag, but it just continues — in my mind anyways, and you can tell me whether you agree — to say that if I'm just looking at a bunch of investors who are buying one set of American stocks, that is probably too much concentration and there's better value elsewhere. And when you get out to these levels and this optimism, normally this is some a near term top, or you have some reversal around. It doesn't always happen. But generally, these are the times where you start sniffing around for where there could be a problem. These are generally some of the signs that you're going to see.
Yeah, there's lots of ways to bake a cake, right? And we tend to really think about how do we compound the capital? How do I double my money five years, seven years, ten years? And there's lots of ways to look through that, right? It's the old rule of 72. If you're buying things with the notion that you're going to sell them eventually in the short term to make a profit, then you're doing something that's a little different than that long-term compounding. There's pros and cons to all strategies, and there's different tools for each strategy. And as I say, any time you get into this market environment, there's lots of ways to think about compounding your money over time. There is certainly a subset of stocks that have garnered a significant amount of attention and a significant amount of trading. And those can be tougher situations on mass to compound in a buy and hold type situation.
One of those stocks is NVIDIA, by the way, which I think we talked about the last time. Earnings were up. They were still spectacular, but not spectacular enough, and the stock sold off. But now it's come right back to where it was before. And now you've got your earnings tomorrow, and there's lots of people speculating around what's going to happen with that stock once earnings are out on Wednesday afternoon, just to put a time stamp on this. But it's an unusual market. Again, just our conversation with Nancy and our experience in the US over the weekend, that enthusiasm is something we always look for. I like to see activity because economic activity leads to growth and ultimately leads to profit. So that's a good thing. The consumer out and active, and certainly we see that in the US, not as much in Canada. I popped into a mall this morning in Winnipeg, and it was very odd how quiet it was and how it just seemed like the inventories were down on the shelves, and it was a discount mall, too. So it's not something you might expect, maybe the shift down in terms of where people were shopping. Again, these are just anecdotal things. You've got the actual empirical data which says some of these measures are showing that enthusiasm. And you see the difference between Canada and the US. Again, nothing wrong with GICs. Nothing wrong with having some emergency savings or having a nest egg of savings, just in case there's a rainy day coming or a snowy day, to go back to where we started this. But at the same time, most Canadians need to have some growth in their portfolio. At the very least, I'd rather be in fixed income versus cash. Instead of saving, I want to invest. So dollar cost averaging allows me, even in this environment, regular investing, to continue to invest. And in some ways, again, if I've got another 10 or 20 years of work, I want a correction. I want the market to pull back 10, 20, 30%, if I'm doing it that way. And if it doesn't, that's great. I'm buying more and it goes up in value. So it just seems like a perfect environment for that instead of all-in or all-out, which seems to be the extremes of what investors are doing right now. But anyway, Stu, a fabulous Stu’s Days again, and we'll check in with you next week.