The Canadian Investor - 2020 U.S. election and a profitable marijuana play

Episode Date: October 24, 2020

We start the episode by talking about some recent headlines. We look at a profitable company that has exposure to the marijuana & cannabis space. Then we discuss what kind of impact the 2020 U.S. Election could have on your investment. To finish the episode, we bring back our Tip of the D’eh! Tickers of stocks discussed: GOOG, PYPL, MSFT, SQ, STZ, WEED.TO Twitter: @cdn_investing Getstockmarket.com --- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee 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

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Simon, we got some exciting news coming out today. The top of the headlines being Google's antitrust trial. And this to me, I have my hot takes, but I'm wondering what your first reaction hot off the press was when you saw that they were going to be convicting Google of this. Yeah, I mean, we'll see if it goes through. Yeah, I mean, we'll see if it goes through. It still has to go through the courts. And I'm not sure exactly if it's going to turn out well or not for the federal government, the US or Google. My first reaction was probably going back to Microsoft because they had a similar suit in at 1990s early 2000s but ended up uh you know i think a lot of you know lawyer fees court battles but nothing came out of it all that much for microsoft and they're still a dominant business um i think google will come out i mean worst case scenario in my mind you know worst case scenario they split google up with youtube and the other things, but it's probably a good thing in terms of extracting shareholder value. So I if I would be I'm not a Google shareholder, but if I would be, I would not be stressing about that whatsoever.

What about you? Yeah, bingo. I got an email today from Todd, one of our listeners, longtime listener, great guy. He said, should I be worried about this? I love Google stock. I want to buy more. And should I be worried about this? And to me, this is the Fed flexing that they are taking this stuff seriously, which is probably good. But this one I don't understand, right? Because Google has built a superior search engine and dominating the market in terms of search because of that. And that's because they have the best product. If you want to go use DuckDuckGo, whatever it's called, the claim to protect your privacy, or that you want to go use Bing,

go ahead. You're just not going to get the results you want. And I've done various examples of this when I'm trying to find regulations in my job. I won't find the Ontario regulations on Bing. And then you first search them on Google and it's just like, why would I ever use another engine when this one provides me? So it's not a monopoly that is built off a criminal nature, but they built the best artificial intelligence,

and their market cap has been rewarded for that. So I don't get this one, but the Fed is taking it seriously. In other news, you were pointing out today that crypto is on fire because PayPal is allowing users to buy and sell crypto on Venmo. Yeah, exactly. Well, they will be before the end of the year. That was the announcement yesterday. So they're kind of they're following in Square's footstep when it comes to that. But obviously, PayPal is a much bigger player than Square.

And full disclosure, I do own shares of both PayPal and Square. I think personally, it's probably a good move for PayPal in terms of the gain in popularity from cryptocurrency. Obviously, most of their business will also still be from transaction from either debit credit. But it does give, I guess, more legitimacy to cryptocurrency as a whole. So user will be able to buy, I believe, trade as well and store a cryptocurrency on paypal so really interesting i mean i also have bitcoin and ethereum so i'm kind of it's been some good news all around for me again i do still believe in visa and mastercards i'm not trying to say one's you know all in on one or the other i think we were talking about that before we

started recording i kind of start like to edge my bets a little bit so my whole like you know war on cash type of thing basket if you'd like does include some cryptocurrency as well but no i mean it's a good it definitely brings legitimacy for to the cryptocurrency space what are your thoughts on that brayayden? This happened sooner than I was expecting. Here's the thing, right? Square and Venmo would love to be able to collect transaction costs on this. So this is another revenue stream for them.

And why wouldn't they if they can pull that lever? But the impacts of it are that you know crypto's pretty legit when the two biggest payment vault like by sheer volume of person to person moving money these two players you know having that as an option does bring some legitimacy to cryptocurrency. I mean, I'm still like the boomer who just doesn't get it, but that's okay. Maybe I'm dead wrong. Who knows? But yeah, I'm still very, very much long Visa and MasterCard.

But we were talking before this. I mean, when you are long a position and you don't have the painted out bear case, then you don't really know what you don't know. So the fact that this is actually like on my radar as, you know, cryptocurrency could be quite legit. It's still very early days. And if it was to take market share from the rails of Visa and MasterCard that they've built, that would be concerning. I mean, am I rushing to sell shares of Visa and MasterCard? No, it's the opposite. I'm rushing to buy shares. So it's something to keep aware of.

If you don't know the bear case, well, then you probably don't understand the business. So that's just something to understand. All right. Go ahead. I was just just gonna mention one last thing the biggest impact i think for me where it could have is for emerging markets where there's a lot of inflation for certain currencies i think those we could see a big impact there but yeah we'll see what it kind of what happens the next 5 10 15 20 years yeah it's it's going to be interesting to see how it all

unfolds uh for me it's toss up a coin and then they're too too hard to predict pile um but if you wanted to take a shot on it i mean go for it yeah for sure i know i know you definitely do all right so moving on we want to talk about a couple other things on the show. We're going to talk about the election really quick. Curiously see your take on that, Simon. Are you someone who looks at the election, makes changes to your portfolio, has some sort of anticipation to what you think might happen? has some sort of anticipation to what you think might happen? Or do you not worry about it at all as a long-term investor?

Who's at the helm in terms of the upcoming election? Yeah, I mean, personally, in terms of the stocks or the companies that I hold, I don't think it will have a big impact. So from my perspective, I really don't worry about it all that much. Having said that, it could have some pretty significant impacts on certain sectors and especially in the U.S. So if you own health care in the U.S., specifically pharmaceutical companies or health care insurers, things like that, there could definitely be a big impact from the U.S. election. That could have some impacts longer term. I would say probably oil and gas as well. There could be some impacts for that medium longer term. Everything else, I think it's a bit harder to say. I would say the other one that's very

intriguing and the U.S. election could have a big impact, and I'll talk about it a bit later on, is the marijuana and cannabis space. That is definitely one of the areas that if you're interested in that space, you definitely should be paying attention to the U.S. election, or should I say the shitshow that is the U.S. election. Oh, God, it's tiring. Okay, good point. I like that you brought up those sectors because there are implications. I mean, it's easy to say, ah, whatever, long stocks. But there are some implications.

For me, I don't worry about it too much at all. Studies and data long term have shown very little correlation between who's in charge and the stock market. Because on the short term, we've noticed that the economy and the stock market can be very divorced from each other for long periods of time. And at the end of the day, long term, great companies do well because of their competitive advantages, because of their long term profitability, because of their growth. Good businesses do well. It doesn't matter what's going on politically. Good businesses do well. So if you hold good companies, then you don't need to, you know, get stressed about this stuff.

Long term, it's all going to be OK. So I want to touch on that a little bit. You mentioned cannabis, and you've done a little bit of research beforehand of a specific company you want to talk about or two in the cannabis space. So shoot us that info, Simon. 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 money sense 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 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. Yeah, so I wanted to talk about

some profitable cannabis companies. Wait, profitable? Yeah, I know. Cannabis companies? Those are in the... Wow. Okay. I know. I'm excited, Simon. Yeah, exactly. So there's two plays that I find really interesting. They're not without risk. So obviously, there is still risk involved. but there's definitely a lot of interesting things going on for them. So the first one, people might be familiar with them, maybe not with the actual name of the company, so it's called Constellation Brand. Not to be confused with Constellation Software. That is correct, yes. So the ticker listed in the U.S., STZ.

That is correct, yes. So the ticker listed in the U.S., STZ. So Constellation brand, if you're not familiar with it, you'll probably be familiar with their most iconic brand, which they own Corona beer. So I'm sure, Braden, you're familiar with that? Let's go with I'm too familiar. Yeah, I'm not a big beer drinker, but, you know, lime in there,

it's pretty awesome. It really does hit different with the lime. I mean, that's good quality stuff. And I don't mind paying a little extra, right, compared to other beer brands. And that's why they've done so well. They also own several wine labels and liquor brands, although they're not as well known in Canada for those. But my understanding is in the U.S. they're quite popular. So basically, Constellation brand, that's where they get most of their money from. So why is it a cannabis play?

Well, they actually have a 38-39% stake in Canopy Growth. So Canopy, who has been obviously losing money quite a bit as all the other Canadian producers. But the fact that you have that option of investing in a company that is highly profitable, they also pay a dividend. About last time I checked, it's about 1.6% in terms of yield. So not too shabby in terms of dividend. Really well covered by cash flow and basically canopy is uh they're backing canopy and they're really profitable they have a good balance sheet so it's a really nice place to have some exposure on the cannabis market without having

to worry if the company is going to go bankrupt or not so that. That is nice to be able to sleep at night. Exactly. So just kind of a few things to look at that I was looking when I was looking at consolation brands. So the growth rates have been really solid over the past 10 years, whether you're looking at cash flow or revenue. When you look at the revenue compound annual growth rate

for the past 10 years, it's 9.5%. Free cash flow is 20%, so really solid. The dividend is covered, I think it's about 50% of free cash flow, so no issues there. It'll be sustainable. Dividend has more than doubled since 2015, although they've kind of kept it stable recently in the past two years but that's due in part of their investment in canopy growth they've they still hold warrants to actually get for canopy growth to have a more than controlling stake into them that they can exercise I don't have

the exact prices of them but they do hold warrants for that. The one interesting thing, and we tie us back into the US election, so they have a deal in place for an option to acquire acreage holdings, which has a big present in the US where it's legal in certain states. The agreement comes into effect if it becomes legalized on the federal level. So what I really like about Consolation is they have basically a plan when it does become legal in the U.S. Whereas if you look at some of the Canadian plays, they don't all have that opportunity to grow in the U.S. And because that they have such a, you know, a understanding of the beverage space and the branding and those high margins I think it's a really interesting pay from that perspective so like I said they provide a backstop for canopy growth is

profitable and cash flow positive in terms of the pros of investing in them solid exposure to the Canadian cannabis market. They have plans to expand in the US, like I just mentioned, when it does become legal on the federal level. And as a side note, you won't see any companies listed on US exchanges because of that reason. So they can't do it because it's not federally legal, even though a lot of states now are having it legal on a state level. Like I said, it provides a well-covered dividend and has experience in operating some really strong brands that have high margin. And I think that's really the most intriguing thing about them because more and more we're seeing in Canada, and you have to imagine it'll be the same in the US where it becomes a commodity and one of the issues with that is as they're

trying to fight the black market they're just reducing the prices so their profit margins goes way down so that's why a lot of those companies have not been as profitable as people were expecting because initially their prices were high but they were seeing that people were not coming away from the black market because they could get the same kind of stuff at a cheaper price so yeah that's that's definitely an interesting play some of the risk well first of all they clearly overpaid for cannabis. Yeah, can I reinforce that? They way overpaid for cannabis. That was in the peak of the cannabis craze in public markets. Yeah, so they clearly overpaid for cannabis, and that's definitely something that you have to keep in mind.

Management has made some changes since then. They did oust a former CEO, Bruce Linton, or whatever his name was, of Canopy. So they basically told him to leave. They have people from Constellation Brand on the board now as well. Canopy is still burning cash quite quickly. So that's an issue, although they do have $2 billion in cash

and cash equivalent on the balance sheet. So they should be okay, at least for a year or two in terms of cash. And it's really unsure at this point how big the edible or the marijuana derivative market will be, especially in the States. I know if you if you remember braden people were making these crazy assumptions in canada early on about like this the market's going to be this that and the other like you could see numbers ranging from like a few billion dollars to like 20 billion i was writing blogs about this in october of 2018 of absolutely out of control assumptions that were being made. Not to toot my own horn, but I just completely crystal balled this one of these assumptions being out of control. And they were they were a complete flop.

Oh, yeah, exactly. And I think and that's a good learning opportunity for people as well. When you see these estimates that have such a wide range, that should kind of raise red flags for you. If you see something from like I maybe exaggerated a bit, but from a few billion dollars to, you know, 10, 12 billion, I think those are the ranges that the numbers that were being thrown out there. And when it's not a legal market, how the hell do you those are the ranges that the numbers that were being thrown out there. And when it's not a legal market, how the hell do you know what the market is going to be? So you're just kind of making guesses. And we're seeing right now that those were obviously guesses in hindsight. Not to say that the US will not be a big market, it will surely be a big market when

it comes legalized. So I think the biggest thing to look at from an election perspective, I don't think it will necessarily be who becomes the next president, whether Trump still stays there or Biden wins. I think the Senate, if it becomes a Democrat Senate, the Senate will have the power and the votes to legalize marijuana. I think that will have a bigger impact than who is president i think president is kind of a it doesn't really matter to be honest who wins in terms of legalization if the senate is a majority democrat it'll probably get legalized yeah this is a good point so speaking of consolation for a second, do you know if this is true? I was speculating.

I heard that Corona beer in Q1 was like smashing quarters because everyone had Corona on their mind. And can you confirm this? I remember seeing a report that it was just out of control blow up, blow out quarter for the the corona brand in q1 i really don't know i thought i saw the opposite honestly i thought people yeah people were afraid because it was called the beer definitely has the virus um i we're gonna we gotta fact check that later, but that is funny. So something I wanted to ask you, because this is what I'm struggling with a lot when I try to decide which cannabis company is the most quality. And when I compare it to the beer market, like Anheuser-Busch and Constellation, who sells Corona, when I draw that comparison, it's all about brand. It's all about branding.

And there's just no brand loyalty in the cannabis market. You saw it rolled out here in Ontario, and they give you the like all warninged up and black box type product from the dispensary that has no branding on it. There might be the logo of like Aurora or one of Canopy's brands on there. I don't know anyone that has any real brand loyalty to buying this cannabis at the dispensary and maybe maybe I just don't know these people but I don't see any brand loyalty and I'm curious and there might need be no right answer for this because the whole industry can't figure it out. But where do you get away from that, right? Because they've took the packaging into control of government agencies. There's just no brand appeal. And I struggle to figure out which one comes ahead because there's just no moat. And like you said, it's become so commoditized. 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 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. Yeah, I think the flower itself, so those smoking weed, I think you may have a niche market for really high-quality organic weed, and people will pay for certain

brands that have that I've shown I think for the most part people kind of just want the best deal or the highest THC content I think that's what people go for interestingly enough though I've had a few of the drinks that had cannabis in them and they actually have better branding on the drinks so you can actually recognize them they taste different um i already have a few that i like better than the other and some of them i wouldn't go back because it just tastes weird um one of them actually we tried tastes like almost like beer which is interesting um but has no alcohol content so i think if uh to me, the really,

what will probably be the highest margin, and I could be totally wrong on this, I think the flour will be a losing space overall. Like I said, you may get the niche market for the really premium stuff, but the branding for the edibles and the drinks. And the oil too, right? You know? Yeah. Yeah, well, exactly. Edibles, oils drinks and the oil too right the you know yeah yeah well exactly edibles

oils and things like that i think is where really the money where the companies that do the best branding will do will do well i mean i could be wrong they could become commoditized as well but i could see people being more loyal because you know there's a taste right the the drinks won't taste the same you like a certain taste you like what you're getting in terms of buzz um in terms of effect and you'll stick with that whereas the flower i mean i think it's that'll probably be you know the best value is what people will go towards too okay yeah we're totally aligned there. The drinks make sense on branding. And I feel like that, you know, humans are better at detecting what they like via taste versus smoke. Just hot take. But that's, that's got to be, there's got to be something to that. So you're probably right, the flower does become commoditized and that's just where i struggle with investing in this space but it's one of those wait and sees for me um but that's that's a really really good breakdown was there another company you had for a son yeah i think i'll i'll probably

bring it up another time because i know we want to do industrials and not to go too long but yeah as to sum it up consolation I think to me it's a really interesting play to provide you with like a floor so at least you know you know you're you have that backbone beer business that is super profitable you have a dividend and but you have that upside and the expertise of uh you know if it becomes legal in the U.S. and that potential of high margin and that new edible and drink market in the US. So they're really well positioned. You know, there's a lot of factors that are out of their control. I totally understand that. But it is one that I'm

considering just starting a small position to just have a bit more a bit of exposure to the marijuana and cannabis space that i don't have right now and it does provide kind of that floor and to me it has a decent ceiling as well yeah the ceiling is is incredible i mean that's the upside is is amazing um in regions outside of canada like we said the assumptions that the weed market in Canada being outrageously huge was quite silly, and we saw that pan out as being quite silly. But the ceiling outside of the borders is massive. And we were talking about an election.

It doesn't probably mean much for most of your stocks, but these ones probably means a lot for your stocks hey everyone you may have guessed it i'm recording this after the fact brayden and i recorded earlier this week unfortunately our discussion about canadian industrial company was the audio was corrupted so i had to remove that section um. But you don't have to worry. We'll be talking about it on next week's episode. So I'm sure every one of you were looking really forward to hearing our discussion on those. We'll have to keep you hanging.

I know we mentioned it earlier in this episode. But because the quality was just not good, it would not have made any sense. It just made more sense to remove that portion. And we'll do a fresh segment next week i'm sure it'll be a great discussion and really look forward to discussing that with brayden hopefully you enjoy the beginning of the episode now we'll get back to the end of our episode for the portion where the audio actually works hopefully you enjoy it and looking forward to talking to industrial wood wood Braden on next week's episode.

I am going to throw in one last segment. I'm bringing it back and Simon doesn't even know that I'm bringing it back. It's time for the tip of the day. We haven't done one in a long time. So I got an idea. Listen to another podcast the other day of how to track your positions. I mean, if you own 20 stocks, and each quarterly report comes out, you see, you know, okay, they beat revenue, they beat that, like, there's so much noise, right? stock always moves up or down because of what it was in relation to Wall Street estimates, which I think is complete trash. For someone who's not in the industry, I've never understood this. I don't get why the benchmark is analyst expectations when the core business model usually has nothing to do with if they met earnings estimates.

So my recommendation to you, tip of the day, is think of one to three, no more than three KPIs, I'm going to say KPI, just a metric that you can compare the business to. And if it's a business that generates lots of free cash and you bought it because of that, track is free cash going up or down and is it meeting your expectations versus not, okay? And if it's a software company and their whole idea is to get more active users, just track active users. Don't worry about any of the other metrics because the stock will move up and down based on metrics that are not always

core to the business. If it's a software company and they're trying to grow users, track users. It'll be at the top of their report every single quarter because the business knows it's important to them and that's what you should focus on as well because stocks move like a yo-yo and over the long term it doesn't matter if you track what's important so that's that's my tip of the day yeah no it's uh it's a really good tip i wish you had given me a heads up i'll think about one the next next episode but i'll consider yeah now you need to think about your next one yeah I mean it's a good it's definitely you know it's a really good thing to do just take Netflix for example their stock kind of moves with the user subscription increase

so in terms of of subscriptions that they have so that's probably the one metric you need to play pay closer attention to it if you want to understand the movements a bit more so uh that's yeah that's a really good tip and it's easy to it's easy to track right if you have all your positions in the excel table you just have one metric that you're tracking just one and if you don't know what that metric should be like if it doesn't pop out to you right away you need to reconsider why you own the stock. Because that will also reinforce your thesis from the start is what is the growth story here? Right?

Like if it's Netflix, it's yeah, it's paid subscriptions. So that's an obvious one. But something to think about really easy to set up. I'm doing this myself with my portfolio right now. That does it for this week, guys. Getstockmarket.com brings you to Stratosphere. All the metrics I'm talking about are on the company search platform. I just added free cash flow that you can graph for every single company today.

The screener, I just fixed all these bugs. Thanks for all the comments from the community. And we will see you guys next week. Thanks. Bye-bye.