The Canadian Investor - 20 Stocks Boosted by Share Buybacks

Episode Date: November 28, 2022

We go over a list of stocks that show how share buybacks can supercharge returns for shareholders if they are done right by management. We discuss the pros and cons of a low stock price for a great company and the difference between a closed end fund and open end fund.   Tickers of stocks discussed: AGO, DDS, DQ, DLTR, AMP, AZO, ORLY, MSI, CAR, MUSA, LOW, CACC, WEN, GME, DBMG, RH, KFRC, NKE, V, AMBC Shakepay Bitcoin Survey Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. Today is November 23, 2022. How we doing? Welcome into the show. My name is Brayden Dennis, as always, joined by the presidential Bélanger. Good, sir. We hopped on the call.

We're like, let's just get this done because Canada is playing in the World Cup today for the first time in how many decades now? What was it, 1986? Yeah. Last time? Yeah, that's it. You know, I was born just pretty young still,

but not since you've been born, huh? No, not in my lifetime. So I'm pumped. I got a tough road ahead of them. And when you're listening to the show, since the people got to edit it and turn it around, you already know the result, but I hope they do all right. I'm excited to watch. Simone, we got on the slate today. We're talking about the good old tax-free savings account here in this country. We are talking about share buybacks and some listener questions about capital allocation and if it's actually a bad thing if stocks go down for the actual business, which is, I think, a great question and one that a lot of people probably think about but don't really know the answer to,

so I like it. No, I think, yeah, we're going to have a fun show. Like it's our regular episode, if you like, in air quotes. So go over a bit more concepts, less news, unless, you know, big news item kind of falls down on us. Yeah. Makes its way into our feed here. All right. Let's start with TFSAs. And honestly, I'm sad when I report on this segment. It bothers me and it reminds me that we got work to do, man. We got some serious work to do. This podcast must go on for the reasons I'm going to mention. So BMO's annual study, they do it every year. And so this was published in January earlier this year and only 49% of Canadians. So call it just straight up half. Okay. 49% call it half of Canadians are aware that a TFSA account

can hold both cash and at least one of the other investment types. Like, you know, it's said in plain English, only half of Canadians are aware that they can actually invest in their TFSA, which is tragic, a word that comes to mind. You know, if you listen to the show, there's a very, very good chance you're investing in public equities in your TFSA. So you are on the right side of the statistic. How do you react to that? Yeah, I mean, I'm not surprised. I mean, it's also too bad. Obviously, my work, I do quite a bit of education when it comes to TFSA, but also RSPs and even RSPs, which have been in place much longer than TFSAs. TFSAs came into effect in 2009. People still don't

fully understand, but specifically for the TFSA, if you think at our friends down the border in the South, in the US, they would kill for an account like this because they have similar accounts. One that comes to mind is a Roth IRA. Roth, yeah. Exactly. The IRA though, not the traditional one. So the Roth IRA works a bit like a TFSA. The main difference is that there are some age requirements on when you can start withdrawing the money. So it's really aimed at retirement. Whereas the TFSA, whether that's good or bad, but I think it's a good thing because it can really, it gives you the flexibility so you can really withdraw as you

see fit obviously you have to make sure that any money you withdraw you lose the contribution room for the current year you regain in the following year but the fact that there's no age restriction is absolutely amazing if you have to be 18 but yeah yeah yeah withdrawal you know what i meant but yeah yeah and the fact that there's no age restrictions, as long as you have some discipline, which I think it's, you know, a key point here. It's an amazing vehicle. It is. And it's relatively easy to understand.

That's the part that I find frustrating in all of this is like, how does this statistic, how can this possibly be? Because when you talk about an RRSP, for instance, there's a lot more nuance to each person's situation, because now we're talking about tax brackets and like income, and there's a lot more nuance, whereas the TFSA, like there's not relatively not much nuance and the flexibility is amazing. Like you mentioned, no age requirement for withdrawals. It's pretty straightforward, right? Like once you wrap your head around the contribution limits and how that works, it's relatively easy to grasp. But here's the problem,

okay? Here's my quick reason to why this has become a statistic. And if you go on to the government's website about the TFSA and you just Google it, the page that will come up, the title of the post on the government website is called the tax-free savings account. And then there's a subheading that says saving just got a whole lot easier. Okay. So I'm going to say the whole segment from the website here, and you tell me what this reads as if you knew nothing about the TFSA. Savings just got a whole lot easier. The tax-free savings account program began in 2009. It is a way for individuals who are 18 or older who have a valid social insurance number

to set money aside tax-free throughout their lifetime. That's interesting wording they're using, set money aside, not invest it and compound it. Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account, for example, investment income and capital gains, okay, first time they're mentioning investment and capital gains, is generally tax-free even when it was withdrawn. Okay, so, you know, if you only read the first half of this, you're like, okay, it's a savings account and it's a place for me to set money aside. What signal does that give to just a regular person?

Yeah, it's probably a savings account. I mean, it's probably the same kind of language that they use for RSP. The only thing is people never say the full name of an RSP. They just say the acronym. And you'll hear a lot more. You know, a lot of people will say TFSA that are more familiar with it. But a lot of people will actually say tax-free savings account where you rarely hear people saying registered retirement savings plan. Yeah, I think that's probably one of the issues.

I've never thought about that because there's- I've noticed that. That S is there as well. Good point. I don't know why I haven't thought of that, but you're right. People know generally the tax-free savings account. They've heard of it. They know the TFSA. But none of this messaging says that, hey, this is a wealth building vehicle. This needs to be rebranded to a TFIA because that is absolutely how this account should be utilized. is absolutely how this account should be utilized. You wouldn't catch me in a million years using it as a cash account because of how advantageous it is to build long-term wealth in it via compounding. So tax-free investment account, TFIA, flip the script on its head. There's no confusion.

I've been saying this now close to a decade publicly. I've been in the podcast game for a long time. How do we change it? Who do I write to? Who do I finally get after this? Because this number can't sit at 49% anymore. My fellow Canadians, this number is not one we should be proud of. I mean, I think it would be politicians, right? Because it was the Harper government, I think, that brought the TFSA. That set it up. With the nice, juicy 10 grand. Oh, man. Speaking of. Bring it back. 6,500 next year. They bumped it up a little bit. Yeah. I guess inflation adjusted. I guess so. Yeah. The CRA. So for those that are at their max already, you'll get a nice increase next year.

You know, I was just going to joke that I feel like you'll die a happy man if they change the name to Tax-Free Investment Account. Forget Stratosphere, forget the podcast, like everything else you've accomplished. If they do that, you'll die a happy man. You just know I've been saying this for a long time. This is not a new concept for me. saying this for a long time. This is not a new concept for me. I had just seen this study recently and it reminded me of this mission I need to pursue. Everything else fails. It's like, oh, Braden got the government to change it to TFIA, like, you know, write it on his tombstone. Yeah. And I mean, it's so true. Even higher earners, right? You'll see oftentimes higher earners that have really generous pensions. I've seen that firsthand.

And, you know, for whatever reason, they have a little bit of RRSP room and they want to still max that out and they don't have their TFSA maxed out. Those are especially the situation where, you know, it makes a lot of sense to actually max out your TFSA because you'll have a high income into retirement. If you have a generous pension plan, you're already a high earner, so you'll already be at a pretty high tax bracket. So you may as well contribute to your TFSA too. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense,

and with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Quest Trade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and

keep more of your money. Visit questrade.com for details. That is questrade.com. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US.

Let's just look at ZEQT, for example, the BMO All Equity ETF, one single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. All right, let's move on before my blood boils here. All right, let's move on before my blood boils here. Yeah, yes. I was talking a couple of weeks ago, talked about net asset value. So NAV, when it comes to whether it's mutual funds, ETFs, closed-end funds. So I'll actually specify,

as I said, I'll talk a bit more about closed-end funds versus open-ended funds. So there are some similarities between the two here. The fund manager buys and sells investment and investors can buy ownership stake in that whole portfolio. That's typically obviously what a fund is. Close-end funds or open-ended fund charge a fee, which is called the management expense ratio, as a percentage of the value of the fund each year. That's how they make money, right? That's why we harp on fees where it comes out of your return. So that's why it's so important.

And it's a variable you can control. An open-end fund is a fund where the fund manager can issue new shares or redeem shares. So ETFs actually work like that. So here's a quick explanation. redeem shares. So ETFs actually work like that. So here's a quick explanation. An ETF provider or sponsor uses what they call authorized participants or APs to create ETF shares. For example, if a fund is designed to track the S&P 500, the AP buys all the stock in the index in identical weighting. The AP then delivers the shares to the ETF provider and in return, the AP receives a creation unit or block of equally valued ETF shares. So APs are typically

large financial institutions such as banks, market makers or specialists. They do most of the buying and selling for ETFs. When there is buying demand, the ETF share price trades at a premium to its NAV. So they will create new shares to essentially get it back to its NAVs. When there is selling demand, the ETF share price trades at a discount, therefore the APs process redemption. So that's why the ETFs will very rarely diverge from their net asset value. And if they do, it will be for a very short amount of time and not by a whole lot. So that's why it's usually very close and you don't see much premium or discount in the NAP. I've never worked for a fund. Are they doing this daily?

Is this like a once a day daily mechanism or is it just like done by algos? That's a good question so i'm not sure i would assume and you know feel free maybe someone will let us know that you know as experienced managing funds i would assume it's done daily just mainly because the nav is calculated daily but right you know maybe not right it's it's probably just in relation to the either buying or selling pressure for the etf in question yeah i'm fascinated by like how this all worked kind of operationally because it's just kind of one of these magical things that there's so much going on in the background and you just

it just works and you kind of take it take it for granted it's like you know everything with technology and like these complicated instruments people just expect them to work and no one really knows how any of it actually works. Yeah, no, exactly. And I had, like, I learned quite a bit just doing this research here and, you know, I'm sure there's still a lot to learn. Now, closed-end fund differs from the open-ended fund, like an ETF, like I just mentioned, because that although you can buy and sell shares of a closed-end fund you know for a lot you know on your broker account for the most part the share count is fixed so that's the biggest difference with the open-ended one is the share count is fixed here so the fund manager is not issuing or redeeming shares like an open-ended fund that i just talked about so essentially investors are

selling and buying shares from each other. So that's why the closed end funds can trade at a discount or premium to their NAV or net asset value. That's because it's the price the market is willing to pay for those shares. And there's no one intervening whether there's a discount or a premium compared to the NAV. So you have to make sure you understand the fun well when

you look at a closed-end fund be careful thinking that a fund is a good deal because it's trading below its nav because there's usually a reason that's the case and sometimes you'll notice that the fund will have been trading at a discount historically for like several years you know sometimes i've seen funds like 10 years where you know there's going to be a discount historically for like several years you know sometimes i've seen funds like 10 years where you know there's going to be a discount between 7 and 10 percent kind of in that range sometimes they go a bit lower sometimes a bit higher so it's very it's tricky i have listened to some podcasts before where you had investors specializing in investing in closed-end fund investment and doing quite well beating beating the market doing so.

But I remember when I was listening to the latest one, it was like a year ago, and the investor doing just that, he said, look, you have to stick to funds that's invested in assets that you know very well. Oftentimes, it's some pretty funky assets too so it's not necessarily stocks and you have to do an extreme amount of research before considering a closed-end fund because of the reason i just said because if you're inexperienced and you just go on the discount to the nav you can actually end up getting burned because the fund could end up trying trading at even a higher discount to the NAB

in the future. So I think, you know, it's definitely something very interesting. There's a niche, you know, for investor there that are willing to put the time. But I think something else to keep in mind is those closed end funds will typically have higher management fees, one to two percent. So it's something that's a bit you have to account for as well and like i said in the previous segment i had done on this if you want to see a fund that's kind of out of whack and there's other stuff going on right now that's close in it's gbtc whether you're not into bitcoin doesn't matter it's just kind of crazy to look at the chart it went from one end to the other remember when we looked at that it was like plus 30% and now I think it's minus 45% to the NAV.

The volatility on trading to NAV is crazy. I've never seen anything like it. I've never seen that before. That's why I brought it as an example because that's how funky these closed-end funds can sometimes be interesting and that data will be available on the fact page of any fund right yeah you have sites that will actually track it historically you know for a specific fund and closed-end funds like you can just google it it's pretty easy to find it on google and they'll basically give you a historical data of the fund nav versus the discount or the premium very cool i'm just showing i'm just

looking up now here on our new platform stratosphere we have etfs and funds and all that good stuff as well so you can look up any management expense ratio what what it holds, geographies, asset classes, industry breakdowns, top 10%, all that good stuff. So that's available now starting Tuesday. So tomorrow, if you're listening to this on Monday, go check that out. You just type in any ETF ticker. All right. Let's talk about share buybacks.

I am calling this segment Pizza the Hut. Simon, don't ask me why I remembered this morning while I was doing my notes. But have you seen the Star Wars parody movie Spaceballs? Oh, it's old now. Yeah, I think I may have. Spaceballs came out in 87. Oh, just one year after our first world cup appearance okay yeah i don't think i've seen it it's a bit of a cult movie and it is a parody on star wars

anyways there's a character named pizza the hut and he dies in the movie because he was locked in his car and he was starving. So he ate himself because he's made of pizza. And that's the level of stupidity this movie is, but it is quite funny. Now, people call compounders that tend to buy back their own stock aggressively and consistently over time with free cash as finance folks call them cannibals. But like, man, that sounds so aggressive and gross, you know, eating themselves by buying their own stock back off the public market. So officially here on the podcast, these companies that aggressively buy back their own stock are officially named Pizza the Huts. Now, over the past 10 years, I have a list here of businesses that have all reduced their

share count by over 40%. And their stock has also compounded by at least 15% on a compound annual growth rate, some of them upwards of high 20%. One of them up at 50% compound annual growth rate, and they have been aggressively buying back shares. So everyone in this list has reduced the share count by at least 40% over the past 10 years, which is a lot. That's a significant amount. So what do you think about Pizza the Hut? Can it stick? Do you think it's good? It's a bit of a stretch, but- It's a working title. Yeah, it's a work in progress.

It's a working title. Here is the list. Some of them I don't know at all. Some of them I know real well. So it's a bit of a mixed bag. Assured Guarantee Limited has reduced their share count by 63%. So I'm going to go from the highest to lowest here. These are all U.S. names.

There are Canadian names that have made this list, but I just did a screen for U.S. because there was more. Dillard's, Daco New Energy, Dollar Tree, the dollar store company, Ameriprise Financial, AutoZone, and O'Reilly. Those are both auto companies. Motorola, really? Is Motorola still public? I don't know. Yeah, I mean. Avis Budget, Murphy USA, Lowe's, the retailer, Credit Acceptance, the Wendy's company, you know, Jabba the Hutt, Baconator combo here.

GameStop, which is funny because GameStop has actually been a net issuer of stock since the old GameStop mania. But still, even then, meets this criteria because they bought back stock so aggressively for the eight years prior to that. DBM Global. Couldn't tell you what that is. RH. That's Restoration Hardware. K-Force. Nike.

Interesting. AMB Financial Corp. And Visa. Good old Visa. So a bunch of these I know, and some of them I don't really know at all. Some of them are $2 billion in market cap on the US exchange. So very small, relatively, some of them. And many of them, as I'm looking through, the ones I don't know, the top line revenue has just virtually done next to nothing. But if you look at on a per share basis, because now on the new strategy, you have every metric on a per share basis. It looks incredible. I mean, like, of course, because they've reduced the share count

so aggressively, like, you know, any per share metric, you're changing the denominator. And so you're going to see some good results over time. But anyways, I thought this was interesting because how the compound annual growth rate and share reduction are two really good signs. Like you can see how correlated they are. And that's why people always say the true way to value performance over time of a company is free cash flow per share. That is like the ultimate financial nirvana for stock investors is free cash flow per share on a long time horizon. So anyways, I just thought this was an interesting list. I thought the performance was quite interesting to look at, even when these mature companies that might not be sexy, might not be growing, but through capital allocation have rewarded shareholders quite immensely. Yeah, yeah. Motorola is still publicly traded.

So ticker MSI. Okay. Worth $45 billion. So it's still worth. What? Yeah, because they don't. I know we tend to associate Motorola with like the cell phones, but they actually, a lot of their business comes from providing equipment for cell towers.

Yeah, so they're one of three or four providers. Yeah, Motorola and Ericsson do this. For some reason, I thought this wasn't Motorola. Yeah, Motorola, Ericsson. There was Huawei as well, but we know what's going on with them and the restriction because they're Chinese and in the US and Canada. So Motorola and Ericsson, I think think are the two bigger players in that space. Yeah.

What old cell phone manufacturer am I thinking of that I'm confused? No, I had a Motorola Razr. I'm just thinking of one that like got bought and then went to Z. I'm thinking of Nokia. Okay. Which Microsoft bought way back when, right? Yeah, I think that could be it. Yeah.

I'm thinking of Nokia, not Motorola. Yeah, Motorola is still like- Pretty big company. right yeah i think that could be it yeah no i'm thinking of nokia not motorola yeah motorola is still like a pretty big company stable and big company with the 5g business yeah yeah their revenues were kind of i'm on stratosphere checking them so the revenues kind of went down in the mid 2000 you know 2014-15 and then i've been pretty much steadily trending up since then. So yeah, they have. Interesting. Now, yeah, yeah. And you look at that and you're like, huh, look at this top line.

And then look at the stock. Like the price is fantastic performance. And so this is a perfect example right here. You've had on a five-year growth. Okay, this is perfect. Okay. Revenue has averaged 6% growth on a five-year growth. Okay, this is perfect, okay? Revenue has averaged 6% growth on a five-year basis and earnings per share has compounded at 17% on the same basis, the same exact timeframe.

So that is what we are talking about with real data and a real example right here. Yeah, no, exactly. Motorola was a good example. I mean, share buybacks are all nice and dandy. Obviously, there's going to be some extra cost to doing that in the US and Canada. We talked about that recently. They're going to do 1% share buyback tax in the US starting in a couple of months in 2023. And then in Canada, 2% 2024. But the biggest thing with

share buybacks, you want to make sure the management's doing it well. And they know their business well enough to be able to identify where it's actually worthwhile and the business is undervalued. Because, I mean, we should pull data at some point with the opposite end where really bad share buybacks. Perfect example. Okay, here's one. Meta over the past two years. Oh yeah, that's right. No, you're right. Because the management team and investors are going, look how cheap this thing is. We have this growing business. And then of course, the story changed aggressively when investors are like, no, I'm not in on the meta thing, dude.

when investors are like, no, I'm not in on the meta thing, dude. I'm in on you making money with Facebook and Instagram. I'm not in on meta. And so it was just a giant capital incineration of buying back stock aggressively over the past, I don't know, 24 months. Yeah, exactly. So that's, I mean, we did an episode on that with the pros and cons when you're returning capital to shareholders, whether a dividend or, you know, share buyback is better. You can make an argument for both, in my opinion. You know, if you're not going to be able to properly value your stock and pull a Facebook or Meta, you know, you probably are better off just doing a special dividend or something like that, because then your investors can probably invest the capital better than you are. So I think there is pros and cons,

but at least a dividend, right, it comes right to you and then you can decide what to do. But you know, I think there's good and bad to both. You just want to make sure the company is doing it well if they are doing share buybacks. You know, who's been a big proponent of special dividends is Costco. Every once in a while, they're just like, hey, here's a ton of money we can't spend fast enough. So here it is. I think it's a great thing because if you're going to pay a regular dividend and you want some flexibility, well, just do a small dividend. So you're not really- Tied to the increases. Yeah, exactly. You don't have to like, because if you constantly increase your dividend, it becomes higher and higher.

If at some point your business slows down, you need to reallocate capital. Like oftentimes what's going to happen, your stock price is going to get smashed if you cut the dividend. So that's a good strategy is you do a small dividend. Or you just stop increasing it. It's like a treadmill you can't get off. That's it. And if you do a small one, it's just a very small one. And then as the business is doing well, once in a while you have too much cash, you just do a special dividend,

but it doesn't tie you to anything. So I think that's actually a very good approach. It gives management more flexibility. Everything they seem to do over there at Costco is a good approach. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free, American ETFs, not just a few select ones, all commission-free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way.

As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite,

and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products.

Please check out the link in the description of today's episode for full disclaimers and more information. Let's move on to this listener question. But before we do that, this episode comes out on the 28th, Monday. If you're listening to this, you officially have just today because of November 29th, our new platform comes out, the pricing triples into US dollars only the new platform is sexy. And so if you subscribe today on stratosphere.io, you will indefinitely be locked into the current pricing. We're not going to increase your pricing. So today's the day. All right, let's talk about a listener question here from Stuart. Yeah. So Stuart sent us a great question. Remove his last name, but I'm sure you'll

know who he is. So as advocates of investing in great businesses, do you see any risk if a great business finds a stock price sinking too low? Or should one just stay focused on the business fundamentals? Thanks a bunch from Saskatchewan. Well, like you mentioned earlier, I think that's a great question. I actually never really thought about it all that much. I don't know. I don't know about you because to me, you know, and I'll go over some things to consider. It's always, you know, if you have a great business, it's trading cheaply.

It's just good, good, good. Right. But there are some things to consider here. First thing. I think I thought about it quite a lot. And some of the beginner questions that come up are like, you know, why does the stock price matter for the business? And why do companies go public? Is it good or bad for the company if it goes up, if the stock price goes up? Like those kinds of questions, I think, are quite common and beginners ask them and no one really answers the question. So here's our

opportunity. Yeah, no, exactly. So the first thing that came to mind for me, if it's a great business, then they'll have a great balance sheet. So that means that they won't need to get financing from equity markets to continue operating. So that's because if you want to get financing, there's generally two main ways to do it. You either do a share offering, a secondary offering,

or you get debt. So if you do a share offering, a secondary offering, or you get debt. So if you want to issue shares with a secondary offering, then to hire the share price to better because the company can get the amount of cash they're looking for by issuing a lesser amount of shares. So that is something to consider. But obviously your question is about great businesses. So in my mind, and maybe you disagree with that businesses so in my mind and maybe you disagree with that but in my mind if it's a great business they're usually well capitalized so they do not have an immediate need for additional capital okay so the second one here a lower price for the purpose of this let's just say that a lower valuation or a lower price is kind of the

same thing it's not always the same thing. So I'm just going to go on this assumption here that it's also a great business. Now, lower price is not always a lower valuation. A company's stock price could be down quite a bit and it can still be trading at a higher valuation than it was, say, a couple of months ago. For example, if you look at a P-E ratio, if the earnings have fallen more than the price, then a lower price will not mean a lower valuation. So anyone starting, that's really important to keep in mind because if you go on certain financial sites, you know, you'll oftentimes they'll show you the trailing 12 months. Well, trailing 12 months P-E is all fine and dandy. But if, you know, the company, the latest quarter just took a nosedive, it's still going to be artificially high compared to what it's going to be forward.

So that's something to keep in mind. You see that a lot with banks, right? People will look at banks. They think they're really good value, but they're entering a downturn. So, yeah, they're good value because their earnings were super high in the last 12 months, but now we're entering a recession. The earnings will be much lower. So you have to be wary of that when you see that. It's like when you buy cyclicals, they're actually cheap when the PE is high. It's completely contrary to what you would think.

Yeah, exactly. So you just have to make sure i took p because a lot of people are familiar with that but whatever ratio you're looking at just make sure you know you understand the data you're looking at i think that's the most important thing now three a lower price that the company sorry i messed up my notes a little bit here but a lower price means that the company can buy back its shares at a lower price so we actually just thought about that or just talked about it so for me obviously if it's a great company it means that they have tons of free cash flow which means that they can buy back shares at a better valuation which is good for shareholders again here lower price i'm thinking i'm assuming the valuation is better if it's the price is lower because it's a good company.

So I'm just making some assumptions here. So don't tweet at me on Twitter saying, I don't know. I get they're not the same things. This is about being opportunistic, right? Exactly. A lot of companies will be maybe doing better than ever in a large market drawdown, and they're just super opportunistic with buying back stock, then that makes sense. Companies that come to mind being really opportunistic with buying stock, buying back their own stock, S&P Global comes to mind, and Thermo Fisher comes to mind. If you look at historically, when they aggressively bought back stock, like way more than their usual,

it is when their stock is in a drawdown, whether it's individually or on a large market drawdown. Historically, they almost, those two companies come to mind as having incredible track records of buying their stock when it's trading at lower prices for just no reason. And that usually comes with large market drawdowns and has nothing to do with their actual business. Yeah. I think Berkshire has been pretty good. Good example. Yeah. Yeah. And one of the main downsides that I think you can see if the stock price is lower, and now I'm just talking about like a lower, the actual price, I'm not talking about the valuation here. If the company is looking to attract top talent, specifically in certain industries, I know you're very familiar with that, Brayden.

They may need to provide more shares if the share price is down versus if it were higher. And we saw Toby from Shopify. What was it? I think it was in the spring or something. He was bitching about the shares being down and it was costing them more because of that, because of the stock-based compensation to attract talent. So what it means for a shareholder when that's the case, it just means that they'll dilute existing shareholders more with that stock-based compensation. Really good one to call out. And yeah, yeah i mean it was kind of embarrassing for toby those tweets i was like dude i was like dude just you don't know what you're talking about unfortunately

just stop talking and then he was comparing it to he's using all these like sports analogies and his sports analogies were funny because like you could tell he doesn't know sports it was just like dude just work on the business the stock's in a huge drawdown you guys are still doing well fundamentals wise so you know just keep out what you're supposed to be doing pal yeah yeah exactly and obviously the sbc that's definitely more specific to like tech for example right so high growth that's it so if you have like a company that's a bit more established you know they may still want to attract top talent but sometimes they'll have different ways of doing it or they, you know, they're so flush with cash that they'll just be like, well, we'll give you a bonus in cash, right? Like we don't care. We don't want to dilute. I know many of you guys are familiar with Constellation Software because I talk about them so much. It's my large individual holding.

Mark Leonard has tons of commentary on his thoughts on stock-based compensation and particularly in technology because he runs a software acquiring business. And they IPO'd at 21 million shares. And today there are 21 million in shares. He doesn't believe in buybacks nor stock based compensation. He actually makes management buy shares on the open market with their bonus. It's like tied to their bonus. So that's a very unique and interesting incentive structure that still gives ownership to the team without diluting existing shareholders via stock-based compensation. Yeah. And I, you know, most of my experience working is in HR and I've worked closely with compensation in my career and there are other ways to attract talent. So it's not like it's stock-based compensation or nothing. There's things called retention bonuses where, you know, someone will be be hired they may have a pretty large bonus attached on top of their regular salary and the prerequisite for that bonus is

that they have to stay a certain amount of time to be able to get it right so there are ways you know it's not like sbc or nothing there are ways to attract talent so you know rest assured it's not the only way perfect so now like the last thing i'll mention here is a lower share price for a great company that has strong fundamentals including a good balance sheet and generating free cash well i think for me overall it's a very good thing keep in mind that i'm not close to retirement. I'm not close to needing the money from my investment. So clearly, if I was close to drawing down, it would not be that great of a thing. So I'm still in the accumulation phase of my life. But it's really important to still do your homework on companies when you see a stock

price that is down significantly, Because a lot of the time, that means the market is telling you something about that business. But in the current environment, I think there is a lot of great businesses trading at either a discount or at the very least at fair valuation. And I'm talking about really, really good businesses here.

But again, we talked about a name recently where if you don't know much about the business, it could look really attractive. And I'm thinking about Algonquin here. If you don't know too much about it, you just know it's a utility, you're seeing that juicy 9%, 10% yield, the stock price being way, way down, you might get excited. But when you start digging into what actually happened, there's a whole bunch of red flags going on. So I'm not saying, you know, whether don't invest in them or invest, I'm just saying the market, you know, sometimes there's a reason and the market is trying to tell

you something. Yeah, good point. I think anytime I'm thinking, is the market really stupid for valuing this year? Like, am I just smarter than everyone? Is a time when you have to just catch yourself and go, there's something I don't fully understand yet. I need to do more research. If you've turned over every stone, then sure. Then maybe like, this is the whole point of trying to find alpha and beating the market.

There is stuff that you can uncover that the market isn't pricing in or thinking about don't hear what i'm not saying that's the whole game we're playing but just surface level if you know you're seeing that that yield yeah like the market's pricing in a cut and they just issued i mean now we're going down the algonquin rabbit hole but they issued a a statement on their ir like a press release just being like some like cryptic messaging about how, yeah, they're probably going to cut the dividend. But then with that, like using every word in the English language that translates to, yeah, we're probably going to cut the dividend without saying, yeah, we're going to cut the dividend. Yeah. And, you know, a lot of the times, not a lot, but sometimes you'll be able to find some really good opportunities where

the market, you know, it could be that the market is just too focused on the short term and is pricing a business maybe correctly for what it's going to do in the next six months to a year. But incorrectly, if you're looking at a five to 10 year horizon, I think that's probably where you can find the most value as an individual investor. Yeah. I agree with that wholeheartedly. I think it's horribly inefficient looking past about like 18 months. All right. It's a good summary. I have three main things for me. One is like, yes,

it actually does affect the cost of capital, especially for these businesses that need to issue stock. And from a stock-based compensation perspective as well, which you touched on. And from a stock-based compensation perspective as well, which you touched on. Unfortunately, the stocks that have this negative correlation to this are the ones that have gotten hammered and are unprofitable and issue stock-based compensation, right? The things that have gotten smashed recently, it matters. So there is some impact because those are the high-tech, high-growth companies that need to issue stock and issue SBC. Now, when I say SBC, stock-based compensation, it's a fancy jargon. All right.

That being said, I was talking to an investor today from the UK. I was giving him a demo of our new software and he's like, yeah, man, I love using your new watch list because I can remove price. I can remove daily price change. I can remove performance historically just while looking at my watch list because it's customizable now. He's like, I just want to focus on their financials and their KPIs over time and price in the short term, I think is a horrible signal. And it's a horrible signal for me for clouding my judgment with bad decisions. And so this is, and by the way, this is a sophisticated investor managing quite a lot of money. So I like the way that he thinks. And generally, people would be best off thinking

like that, both professionally and retail wise. So last thing I'll touch on here, which has been a major theme of today's show and mentioned today, which is this provides an opportunity for smart management teams to have opportunistic capital allocation, is what I'll call, in the form of buybacks and in the form of acquisitions. If the whole industry and market has been marked down and they see valuation multiples contract, it's kind of like the good gets better in tougher times. So those are the three main things I'm thinking about. Yeah. And there's probably one that comes to mind actually that I didn't add. And as you were talking, I kind of thought about that. I guess one of the downside of a low share price goes back to,

you know, a secondary offering issuing more shares, but let's say your share price is already down and there's a black swan event,'re a great business but an event that no one could have seen obviously we saw covid happening a few years ago but an event that no one had foreseen that really puts a dent in your business well you know it'll probably lead your stock price even lower and then if you need capital urgently you're stuck with pretty much heavy dilution or issuing debt and if you're in a kind of environment right now where debt is relatively expensive, it can really kind of put you in a tough situation. So that's very, you know, the probability of that happening is very low,

clearly, but it's something, you know, it's not impossible. It's certainly not impossible. Nothing's impossible. And, you know, on a long enough time horizon, things like this do happen. So yeah, no, I think that's good. Now, I'm going to round out today's show with something that is related to this. And it is a Buffett interview. I love watching Grandpa Buffett doing his thing on these interviews. And he's just so much wisdom. You're like, every time I'm just like nodding my head and he's just so cute. He's so cute. He's so politically correct compared to Charlie. I know. Charlie doesn't give a shit. They're really, they ham and egg it, especially at the annual shareholder meetings. They really ham and egg, yin and yang, perfect for each other.

And so this quote here is, and I thought this was relevant because we were talking about share price. And he was talking in this interview about investing and talking about how he used to think about investing before he went to university and met Ben Graham, which by the way, is hilarious that he's talking about investing. Like he's talking about when he was literally 11 years old. Like this guy's a freak that he's been doing it for this long. that the true goat was literally buying stocks at 11 years old. So here's what he said. I thought stocks were things that went up and down.

I charted them. I read books on technical analysis. I thought the important thing was to predict what a stock would do. I realized I was doing it exactly the wrong way. From that point on, I never bought another stock. I bought businesses that happened to be publicly traded. I became an owner of a business and I did not care if the stock went up or down the next day or next week, next month or next year. I don't know what the stock would do, but I know businesses. I thought that, you know, pretty much anything he says is going to sound great on this podcast because the Oracle of Omaha doing his thing. But it's just a really important reminder of these are not tickers that trade magically through the air. They go up and down for no rhyme or

reason, even though it feels like it in a one day, one month, even one year type timeframe. These are underlying businesses and the underlying performance of the business, their decision-making and the dynamics of the competitive landscape, their moat, their durability are going to weigh to true value over time. And, you know, when we're talking about several decades, like a lifetime of investing for Warren Buffett, the results speak for themselves and thinking like a business owner and not trying to trade in and out of stuff all day. I mean, he's held Coca-Cola since what, like the sixties or earlier. I'm just going off memory here. And he hasn't bought or sold a single share since their initial purchase. Because of stock buybacks, he's doubled his weighting in his

position and didn't buy another share. That's the compounding and share buybacks visualized over time right there. No, I think it's a great quote. And I know there's some really sophisticated people that make money trading. You know, I know there are some that do that quite well. But I'll say one thing. You never hear of long-term investors investing in great businesses, not using leverage, going, you know, bankrupt out of business or losing tons of money, right? So, you know, they may have off years, depending how the stock market is doing, that's fine. But you'll see these massive, you know, hedge funds that it's not unusual, they make one or two really large bets levered oftentimes,

it goes wrong, and then they have to close up shop. So I think that's something really important to remember. And you can just go through Reddit or the internet where you can see people that thought they were awesome traders in the, let's say, up until the end of last year, you know, from the start of 2020. Because, you know, it's pretty easy. You're betting anything, you're doing call options,

whatever they are. The market's in a bull market. Anyone can be an awesome trader. And then when things go sideways, like they are, the markets in a bull market, anyone can be an awesome trader. And then when things go sideways, like they are right now, I know there's a lot of people that lost pretty much everything they had because they just were trading and not fully knowing what they were doing. Yeah. And then, you know, getting into complicated instruments like options because, you know, they watched a couple of YouTube videos on it and then, you know, say thinking, oh my God, I can do this as a career that I can make so much money. I can just trade these tickers on my phone, you know, it's all great. And then, you know,

what happens in 2022, their LinkedIn status changes to back to employed. Yeah, exactly. And because the trading thing, you can't just, you know, make money from no value add over time. Like, I'm not saying it can is much lower than being a long term investor. That's the way that's how I would put it. And yeah, it's and you can go make money with your time and your creativity and not, you know, stare at a screen trading and charting stuff out all day. Yeah, no, exactly. And yeah, I think that's probably the best thing. And, you know, I think probably what people tend to forget is usually we all have to do that in a margin or taxable account, right?

So you're playing, you know, you have that extra thing that's playing against you where you get taxed way more often on any gains. And clearly, if you invest long term in a taxable account, you'll pay that. But just the fact that you hold the tax impact will be much less than trading yeah it's a good psa if you're listening and you're like hmm taxes what i've been day trading in my tfsa shit yeah you can't do that eventually the feds will come knocking yeah and the guidance is not clear on that so you know do it at your own risk no one really knows because it's a very gray gray it's the gray is not clear on that so you know do it at your own risk no one really knows because it's a very gray gray it's the grayest of areas yeah that's it but it's the grayest of areas in tax but if you're gonna trade day trading save do it in a taxable account yes

that is wise all right thanks for listening we got 10 minutes until this game starts let's go let's go baby i'll be watching on my phone in French. You're going to watch the French feed? I love that. Yeah, because I only have the French. They ask the TSN in French. I only have that for the Habs. Oh, like that's the one you subscribe to.

Yeah, and I'm pretty sure they have the rights. Oh, because you're going for the Habs. They usually have the rights because there's no one else. True, true. Interesting. Yeah. So I don't watch soccer, football, whatever you want to call it yeah by the way uh really funny thing when the memes on the internet when the u.s dollar was worth more than

the euro was ha it's called soccer now oh yeah it's amazing because it's like you know soccer versus football calling it and then the usd overtook the euro and like you know one for one and it's like haha yeah we get to call it soccer no whatever you call it the announcers are hype and i don't watch soccer particularly very often but the announcers are absolutely hype and i've been watching the World Cup and loving it. I'll be actually walking while I'm watching on my phone because we're going for a walk with the baby and the dog before our parents-in-law come. Do you have one of those front dad front pouches yet? We do, but we don't have kind of the insulated part. We actually like actually we need a coat. You need a coat extender.

That's what you need to get. We ordered it on amazon we just got notification that we have to go and pick it up in person at canada post for whatever reason what yeah i know we'd never get that so yeah victoria my wife is on there's like no not delivering it you gotta go there must be like duty fees or do you secretly live in like moose factory, Ontario and not Ottawa? No, no, I live in Ottawa. Oh, yeah. The boring city of Ottawa.

Oh, that's too funny. Well, maybe when it's not so cold though. Those front packs is the absolute dad goals. I'll be sure to get one of those. Yeah, I have one. Good, good. All right. Thanks for listening to the pod.

Last reminder, I'll make this quick. You have today. If you're listening on 28th to subscribe at the current pricing on stratosphere.io, because it's tripling in USD only tonight at the, when we said it live. Join tci.com. We can't not thank you guys enough to the current subscribers of join tci.com and the folks that are signing on there on daily basis we appreciate you so much the dopamine hit that i get when i see the email that you subscribe on patreon just know it's very real we see each one the dopamine it works every time it's incredible and we thank you a lot for supporting the show so that we can keep doing this for a long time. Because, you know, this ain't this content grind. It is not.

It is not easy to keep doing. People seem to like the dividend posts with the explanations. Yeah, that I did. Yeah. Yeah. Yeah. For those who are like, what are you talking about? Simone did a dividend income mock portfolio because our portfolios don't fit retiree too well. So it's a nice little ad that is at join tci.com. It's $9 Canadian. We'll see you in a few days. Take care. Bye bye.

The Canadian investor podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.