Motley Fool Money - Canada's Market: Apathy Means Opportunity

Episode Date: July 1, 2024

It’s Canada Day! We celebrate our neighbor to the north with a mid-year check on the state of Canada’s stock market.  (00:21) Jim Gillies and Dylan Lewis discuss: - How the TSX stacks up to the S&P 500 so far in 2024. - Why investor apathy in Canada is creating some low valuations and great buying opportunities. - Two Canadian stocks to watch: MTY Brands and Kit’s Eyewear Companies discussed: BMO, BNS, RY, ENB, SHOP, MTY, KITS Host: Dylan Lewis Guests: Jim Gillies Producer: Ricky Mulvey Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode is brought to you by Indeed. Stop waiting around for the perfect candidate. Instead, use Indeed sponsored jobs to find the right people with the right skills fast. It's a simple way to make sure your listing is the first candidate C. According to Indeed data, sponsor jobs have four times more applicants than non-sponsored jobs. So go build your dream team today with Indeed. Get a $75 sponsor job credit at Indeed.com slash podcast. Terms and conditions apply.

We're celebrating Canada Day and checking in on America's neighbor to the north. Motleyful Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motleyful Canada analyst Jim Gillies. Jim, thanks for joining me and happy Canada Day to you. Thank you, Dylan. It's very much appreciated. I appreciate you putting in a few hours of work today on a federal holiday up at home. All right, let's dig into Canada.

Jim, to kick us off painting a picture of the state of the Canadian Mark, market year to date, I'm going to ask you to fill in the blank here. So far in 2024, investors in Canada are feeling blank. Somewhat apathetic, probably. Somewhat apathetic. Can you expand on that? Sure. Well, the Canadian markets not exactly set anything on fire. You know, it's been, it's up about four and a half percent. If you do a total return basis, I believe it's up about just over six percent.

That compares somewhat poorly against the S&P 500, which is up about 14.5% for the first half the year. Although I do note that dividends added nearly two full percentage points, but 1.7 percentage points to total return for the TSX. But for the S&P, it was about 0.6 percentage points. And we understand why, because if you want to play a little thought exercise, compare to the Canadian market against an equal weight S&P 500. And Canada is actually beating equal weight S&P 500 total return. I think Canada is up about 6%, like I said. I think equal weights about 5, just over 5%.

So that really tells you the story of the American market has been, you know, obviously the magnificent 6. Yes, there's only 6, there's not 7. Because on average, the magnificent 6, which are all of the very top end of the S&P 5 Those are up an average of 46.5% this year. And I'll note for our listeners, the magnificent six you're referring to excludes Tesla. That is the one if you're doing the math at home. That is not included in that basket, Jim. I was declining to say which company it was, but you are correct.

Tesla's down 20% year-to-date, well, at least before today it was. But I have other reasons for excluding them. So, you know, it's, I think Americans probably feel better about their market. Look at me, you know, Canadian speaking for, can-splaining for Americans. But I suspect Americans probably feel better about their indexes and their market because it has gone up strong, but it's been very narrow focus. Whereas in Canada, it's very apathetic, even though, okay, it's up 4.5%. It's up 6% year-to-date with total returns.

So, you know, like double that, assume it just kind of trundles a long way. Like, it's going to clock in a year about, you know, 10, 12 percent total return, which is not actually that bad. The Canadian total return index, the Canadian composite TSX total return, is only about an, we always hear the stock market goes up 10, 11, 12 percent a year. That's the American market. The Canadian market's been about an 8 percent gainer for the past few decades. So, you know, this is, we're on pace for actually a very good year, Canada-wise.

But as I look around at the market, I look at what our companies are doing. The market feels apathetic. So you noted the outperformance for the S&P 500 there. The flip side of that is it's highly concentrated returns. There's a very small portion of the companies that are driving those returns, and that comes with its own risk. And I think that concentration has some people a little worried in the overall health of the market. Are any of those dynamics at play when we look at the TSX?

Nah, they've run, they've pretty much rung out all semblance of optimism, to be honest with you. I spent some time buzzing around this morning. I provided you the numbers, but obviously the listeners haven't heard them yet. So, like, I just pulled up by 10 or 12 names, like, you know, like long, you know, long track records of value creation, companies like Quebecor, Rogers, communications, coaching. Magna, which is a big auto supplier. You don't have to look too hard to find Canadian companies trading well below a substantial discount, like on an earnings multiple basis, trading with substantial discounts to their 10-year relative valuation. I think I gave you 10 or 12 names, and I think the average discount to the last decade's earnings multiple was in the 30 percentage

points. Like it's big. And that's before we talk about REITs. There is a ton of REITs, real estate investment trusts that are all trading with 7, 8, 9% yields run by good people who understand the idea of REITs. Of course, they have to pay a lot of stuff, much of their cash flow, their funds from operations. So, you know, they have to raise capital. They use a lot of debt, or some of them use a lot of debt. A few of them might surprise you how little debt they're using looking at U-Smart centers. And, you know, but still, massive yields. Like, it's not hard to build a portfolio right now of seven plus percent dividend yield players trading it to press. And a few of them have even got insiders and CEOs buying the units on the open market. And that's before we talk about the Canadian banks, which I know I've talked on about here before, five of the six of which are also cross-listed in the U.S. So you can invest in five of the Canadian big six, the only one is not cross-list.

it is National Bank of Canada. And it wouldn't shock me that that is cross-list in the future. National Bank is currently, they're the sixth largest bank in Canada. They're buying the eighth largest bank. And once that deal is done, wouldn't shock me if they at some point seek a US listing as well. But the Canadian banks, so these are like your classic widows and orphan stocks, right? And like they are dominant. Like if you look at the 10 largest companies by market cap in Canada,

The three of them are the banks. If you do expand into the 15, I think you get all five of the big six. Classic widows and orphans, they all had like a track record of rate, two-decade track record before COVID of raising their dividends like nine and a half, almost 10 percent annually. That's pretty good. And during COVID, they were barred from raising dividends because the governments wanted to make sure, you know, you didn't know what's going on, everyone's panicking, to make sure the capital base of the banks is settled. Turns out they did really, really well, and the government then slapped a special banks-only extra tax thing because, you know, government's taxes. But what's been interesting to me is since they've been allowed to raise their dividends again,

which came at the end of 2021, the average of the big six, their dividends today, cumulatively, is 34% more than it was when they were blocked from raising their dividends. So they've caught up with that 10% annual Kager. I was talking about where they raise their dividends. And valuations across the board today, three years ago, the average P.E. was about 12, 12 and a half. Average price to book was about 1.8. Average yield was 3.7%. Today, the P.E. has gone from 12.5 to 10.5.

The price to book has gone from 1.8 to 1.4. Average dividend yield has gone from 3.7 to 5.2, even as that dividend is up by about a third or more, on average, since they were allowed to start it again. And also, too, the big banks are putting a lot of, I don't know if you've heard recently. The Canadian housing market has gotten overly enthused with itself. I was planning on asking you about that. Yeah, that's the source of a lot of this stuff. And so they've been taking giant, loan loss provisions. And I guess my takeaway from all this is, look, this is going to end at some point.

And I wrote a column last week, I think, where I also talked about, you know, like, given the malaise in the Canadian markets, this Canadiansists don't seem like, you know, it's not hard to find, you know, multiples 10, 12 times earnings across really high-quality companies paying good dividends. Canadianists don't seem to care. It feels, I actually wrote. I said that it feels. But it feels like dividend investing is kind of broken right now.

Like everyone's at this points at interest rate hikes and goes, oh, well, you know, I get 5% in a government bond. Why would I want 5% in a dividend yield? It's like this isn't going to, this will not always be the case. It's interesting to hear you say that with dividends because that has been such a newfound focus of the markets here in the United States. We have so many tech companies initiating dividends, kind of going back to the tight of the 80s and 90s who, you know, returned capital in a variety of ways, including dividends,

you know, they were kind of eschewed by the tech industry for such a long time over the last 15 years. Well, I mean, the tech industry, they make so much cash. I mean, you know, you can't spend it all on buybacks to offset dilution. That doesn't help the common shareholder. You know, so it's nice to see. I mean, Apple's paid one for a while. Google, of course, sorry, Alphabet, just started one. Microsoft has done one for a while. But they're still not doing a large out. And, but it just, it just feels, and I'm someone that likes a dividend or two. And I appreciate, I think paying a regular dividend is a really good indication of a management team that does, you know, understands discipline a little bit, frankly. And I understand the problems with dividends.

You know, they are double taxed in theory because they're paid up after tax dollars from the corporation, then they're taxed in your hands, assuming you don't have them tax sheltered. But I just, I find it odd that, again, and it's supposed to be a celebration, right? You know, this is Canada Day. We don't need to be all down here. Well, I'm not down, actually. Because the way I'm taking this from, or what I'm taking this towards, rather, is it won't always be this way.

And one of the ways that, you know, you can get above average market returns over the long term, market beating returns, if you will, is you fish where other people. aren't when they're not fishing there, right? Like, everyone loves Nvidia right now. Cool, wonderful. Everyone's excited. 78,000 articles a day are coming through my feed on Nvidia. You and I are going to add absolutely zero value to any concept of whatever's going on with

Nvidia, right? And Nvidia is very, very richly valued right now. And history has not treated companies that have reached similar. rich valuations has not treated them well over time. See Cisco and Intel from the tech bubble. You can throw in Qualcomm and probably Microsoft as well for the first 15 years. And you come back and talk to me. That's what I'm saying is fish where other people aren't fishing right now. And right now people aren't fishing in Canada. And like I said, there's all of these companies trading at substantial discounts to their 10-year average multiple.

The Canadian banks are trading really, really well. Very, very, very, very. cheaply and they have this history of dividend hikes and, you know, classic widows and orphans. The reet sector looks kind of bombed out in Canada, and yet there's some really high-quality companies in there that are just going for a song. About the only Canadian company I would tell people to stay away from is, you know, the fifth largest company in Canada is called Enbridge. And I just, you know, that one, I think that one's a disaster. But other than that, I mean, everything's fine. So you started us out. You filled in the blank they're saying, apathy, but what I'm hearing from you is opportunity when it comes to the Canadian market.

I think so. Yeah, like I'm obviously a regular investor in Canadian companies and a regular recommender of Canadian companies. It's frustrating. As, as public stock pickers, public foolish stock pickers, there's nothing more frustrating, frankly, than you find a company that you're really excited about. And, you know, like it's, you know, generating lots of cash. It's, its management are smart and are using that cash and the services shareholders. It's trading it a reasonable valuation and you get really excited to put it in front of members. And then it lies there like a dead fish. And even as they continue adding cash flow and investing it for your benefit and it just you

want to get a stick and poke them and go like, what are you doing? Come on, move, do something. And look, I understand, it gives us more of a time to get in and be happy with it. But it can be a little frustrating sometimes. It's an exercise in patience, right? All investing is, and sometimes it takes a while for the market to realize what you're seeing. I do want to ask, in that zone or in that vein of opportunity, you named several companies, including one you'd stay away from.

But I'm curious, is there a company that hasn't come up yet that you would say, you know, especially if you're not someone who's paying attention to the Canadian markets very much, this is one that you should be putting on your radar? You want to go very state and just very easy, or do you want to go kind of a little crazy? I'm going to say yes. Give me one of both. Okay, then. On the kind of stayed and interesting, and it's trading at a really sharp discount, I think, to history.

It's trading where it was seven years ago before it's made a bunch of acquisitions. It's a company that grows through acquisition. It's a company I've talked about on this show before. It's only traded in Canada. Sorry, fools, so you'll have to find yourself a pink sheet. But the company is called MTI Food Group. Ticker is, oddly enough, MTIY. It is trading about $45 right now or Friday.

Markets are closed in Canada today, which is about six or seven times Ibadah. And the thing about MTI Food Group is they are a franchisor of restaurant concepts. And they've got about 90 banners in North America. They kind of, back in the day, you know, I've owned them for over a decade, But back in the day, they were really mall food courts, frankly. Like you'd go into a mall food court and there's 20 different restaurants. You didn't realize 10 of them were owned by M.TY Food Group. But they're all franchise.

So they're all high margin franchise royalty revenues. You know, give me 6% of your sales off the top, you know, plus another 3% for the advertising fee. And you can have all the operational risk and you can have the capital risk, right? And traditionally, because of the high margin cash asset light nature of that company, company, I was willing to pay up about 12 times Ibadah until up about 2006, 2007. You know, it was rare. It got below 12 times I bidda, frankly. And today it's about six and a half, I think. And it's lower than it was in 2017. And just, you know, for names, the next time you go to a Coldstone Creamery, to a Papa Murphy's, to a Blimpie subs, to Baja Fresh,

and there's, like I said, there's 90 banners. There's a Brazilian, a famous Dave. barbecue, you are supporting MTI Food Group. So that's a pretty stayed, easy one. If you want to go a growthy here, Jim, I'm going to say, if you want to go something a little sillier, which, you know, no promises how it'll do, but I think it's interesting. Yeah, let's go pure growth just for fun. It's a company, and again, it's only a Canadian listing, so you either have to have a brokerage that allows you to trade on Canadian exchanges aside. Canadians don't know how good we got it. Every Canadian broker allows you to trade on US exchanges just as seamlessly as the TSX, every single one. But I know you guys, Interactive brokers, I think.

And I believe there's a pink sheet for this one as well on OTC. But a company called Kits Eyewear is interesting. It's small. It's basically glasses online. They can do tests where they try to make the whole process cheaper and easier and doing it largely online. You get your prescription. You upload it. your pupil eye distances, I guess, something else you have to measure.

The ones I'm rare, these are just simple readers. I buy these three for $20 at Costco. Who cares if they break? But like, you know, like my significant other, she wears prescription glasses. Both my parents wear prescription glasses. And, you know, hey, those ain't cheap. And kits eyewear is doing a lot to make it easier. Their growth numbers have been really great.

It's easier and cheaper to buy online. Their growth numbers have been great. The guy in charge, the founder's CEO. He started another business, you know, grew it for years. It was in the online contact, contact lenses business. He started that years ago, sold it for a mint. He's basically running his playbook back again this time with online. So I think we recommended it in gems $3.50, $3.50 Canadian.

It's currently $8.50. And I think I'm going to paraphrase what I wrote when I recommended it about a year or so ago. But paraphrased, you know, this kind of. guy's going to grow it to $20, $25 and sell it again. There you go. There's opportunity. There you go. Jim, appreciate you joining us on your day off and ringing in Canada Day with us. Hope you have a good Canada Day. And I hope you have a good Fuliversary.

19 years at the full. Thank you for all your time here. Thank you. Many of those days spent here on the podcast. Thank you so much. No problem. Cheers. Listeners, that's going to do it for today's episode. Just a heads up. We are taking a break from our usual second segment for the holiday week. We'll have our news-focused combos Monday, Tuesday, and Wednesday. We'll be off Thursday and be back Friday with our usual radio show.

As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against. It's no part of selling anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. Happy Canada today. We'll be back tomorrow.