The Canadian Investor - 25 Point Stock Checklist - TCI Rewind

Episode Date: July 17, 2023

In this release of the Canadian Investor Podcast, we go over a 25 point checklist that should help you determine whether the company you're considering is a worthwhile investment or not. 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  Interested in becoming the next co-host of the Canadian Investor Podcast? Send us a 1 minute video at [e-mail] . 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. Hey, everyone. Before we get started with this episode, there's a couple of things I wanted to mention. First, if you're interested in becoming the Canadian Investor Podcast co-host for the Thursday news and earnings release, make sure that you send us a short video to CanadianInvestorPod at gmail.com. It doesn't matter if you don't have any experience, if you think you'd be a good fit with co-hosting it with

me, go ahead and send it. You have nothing to lose. And then second, some of you may notice that this episode is very familiar. And you'd be right because it was originally released in July of 2022, about a year ago. And we decided to do a TCI Rewind with this episode because like everyone else, Brayden and I do need some time off sometimes. And we decided to get a little bit of vacation time in last week and because of that we have this rewind episode coming out today. It's a really good episode if you've already listened to it then I encourage you to listen to it again it would be a good refresher and if you haven't listened to it before then I'm sure you'll enjoy it and don't worry we

will be back this Thursday with a regular and fresh episode of earnings and news. And there are lots to talk about. So make sure you don't miss it. 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 Braden Dennis and Simone Bélanger. succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. My name is Brayden Dennis, as always joined by the great Simon Belanger. Simon, this was your idea for the podcast here. I think it's a great one. I think the people are going to love this.

Let's just get right into it. How did you think of this idea, by the way? I think it's quite good for a podcast. Yeah, I would love to take all the credit, but definitely we had a few questions from listeners over the past few months asking what their checklist or if there's things that we do when we start looking at businesses, kind of our mindset to certain things we'll look at. So I figured a checklist where people can really action would be a good thing to do. And who doesn't love lists? I mean, they just work. Lists work for the human brain. Humans love lists. Do you do a to-do list like daily or no? I would say I do it mostly mentally to-do daily list, but my wife loves lists and I will do a list when I go to a grocery store. If not, I'll forget things. Okay, when you go to the grocery store, you have a list.

Oh yeah, and Costco. Yeah, that makes sense. Well, if you go to Costco without your list, you're walking out of there with a bunch of stuff that you did not think you were going to come in. You're walking out of there broke. That's what's happening. Yeah. You're walking out of there also really broke.

Okay. So we're doing a 25 point stock checklist. We think, I think it's a pretty good list here and we're just rifling off. You did yours first. You did, you pretty good list here. And we're just rifling off. You did yours first. You did your list first. I was really trying to rack my brain for other ideas. But I think that that was good because I could go into a little more deeper and think about some other stuff as well.

So let's get right into it. five point checklist for the way that we go from knowing maybe even nothing about the company or just a few things to thinking about it from an actual investment perspective. And you'll notice our first couple points or questions we ask ourselves are really, really simple. And that's the point. So without any further delay, let's get right into it. Take us away with number one. Yeah, yeah. And that's a great point because you want to not waste time with some of the later points we'll have if it doesn't meet the earlier requirements. So the first point here is understanding the company and its businesses. You should be able to explain the business to almost anyone

in a few minutes. If you're not able to do that, then you need to learn more about the business. There are some easy ways to do that. You can go to their website and look at their products and services. You can go to their annual reports, the management discussion and analysis, seal letters to shareholders and investor presentations, read from industry experts who know the business well. This could be an analyst, but it could also be someone that you might know that uses their products and services. For me, a perfect example for that is if I were to invest in cybersecurity. I know a few people in that field, so I would definitely try to pick their brains for some of the major players and just get their opinions on it because it's a space that I don't

know extremely well. They've used it. They're the experts. They'll be able to tell me whether they think a product is good or not. And then another way here is just going on third-party sites to learn more about it. This could be as simple as YouTube, some online newspapers, industry-specific site. Stratosphere will have some news and sometimes even a full-on breakdown of the business. Or even a site like Wikipedia just to get a high overview of what the business is. Just some of those even simple sites like Wikipedia for just like a story about how the founders started working on the problem that they ran into. I don't know if it's that me, just the nerd, but I want to know the why as well. So I like figuring out what the story is behind it. But yeah, Stratosphere has not only the financial data, but news and write-ups on a lot of

these companies too. So that's a good resources as well. Yeah, that's good. I mean, this is so critical, right? Like understanding the business, right? Because so my mom manages her own investment portfolio now. I think she's been doing it for five plus years, okay? And of course you can imagine she gets a lot of her information from me. And I just don't like giving even my mother, I love you, but I don't like giving people like stock tips or anything because a perfect example is, it's hard to throw under the bus. Love you, mom. Is she's like my, my, one of my stocks I own that you like, Roper. Roper Technologies is down.

What's going on with Roper Technologies? And I'm like, this is the problem. You don't know what Roper Technologies does or is. You have no idea. And this is a big problem to an own individual securities and not know what they do. And she, she knows about what, like what all the other companies do.

And she's actually a really good investor, but that's just one that she probably shouldn't own. Even though I think it's a great business because she doesn't know what it does. This is so critical. I see it all the time. The amount of people who manage their own portfolio, own stocks of companies. They don't even know what they do.

This is a critical fundamental flaw. That's why it's number one. Critical fundamental flaw. And so, okay, so this one goes across the board, but there's lots of different ways to succeed in the markets. I think you and I have a pretty similar style. So this is just our list. It's not the list for everyone, but I and I have a pretty similar style. So this is just our list. It's not the list for everyone, but I think it's a pretty good list. People could even modify it a bit with something that suits their style a bit more or the type of

businesses. You can use a lot of this stuff, even if you're investing- The risk tolerance. Yeah, risk tolerance. Or if you're investing even in companies that rely on commodities, that's not something we do, but you could modify that to suit those needs too. All right. Number two, is this company obviously durable and obviously great? Now, this is completely unscientific and perhaps immeasurable. Maybe we can go through some examples. But again, we are still in discovery mode here of figuring out if we want to own the company. Very simple questions. Questions like this that will give

you very surface level analysis that will help you think about the actual business. We haven't gone into valuation yet. We haven't gone into anything like that. We haven't gone into the growth, the prospects, who runs the thing, all that stuff. Is the company obviously durable? And is it obviously great? Let's think of an example like Autodesk. Autodesk is the software company that is best known for AutoCAD and Revit, which is software, computer-aided design software for architecture, engineers, construction market. And the market relies and uses heavily with deep competitive advantages in those verticals. If you are in this field, you rely or your company directly relies

on the technology stack that they have created. The company has 90% gross margins. The moat is incredible. Everyone just kind of innovates on top of the software stack. Putting valuation aside, punt that conversation to the side. This is obviously a great business that is very durable. This software has been around since the 80s. And just again, this is so simple and basic. Is it obviously great? And if it's not obviously great, then I think time to keep moving on. Yeah, for one that comes to mind for me for that test would be Lululemon. I know you're not into investing into fashion all that much, but Lululemon i mean like

10 years ago people you know women were loving their lululemon pants or yoga pants and you've had some big players trying to enter and compete with them men were loving those pants too as well but uh that's true um but it's like essentially we're what like 10 10 years later and they still love those pants and now they even are getting into the men's market actually doing a quite good job about it and that's a an obvious example because they're still charging you know a pretty penny for those clothing whether it's pants or shirts or whatever it is and people are still lining up to buy it yes Yes. The consumers recognize that it's obviously great and the business, the results speak for themselves. All right. So my next one. You're number three here. Yeah,

go for it. What is the sector or industry outlook? So this might be a no-brainer to a lot of people, but I think it's an important question to ask. If you think of one that doesn't have a great outlook, and I'll just pick on tobacco here, well, there's probably not much growth in terms of the overall industry in the next decade, for example. Doesn't mean that it won't be a good investment. It could potentially be a great value play for some people that would like to invest in tobacco companies. But I can see with a lot of certainty here that the tobacco industry will not be 10 times bigger than what it is today.

So the total addressable market or TAM won't be 10x of what it is today. And I feel pretty safe saying that in 10 years from now, that won't be the case. Or even just larger than it is. I would take the side of that. It'll be just overall smaller in general. Yeah, exactly. I think that's a pretty safe bet, but I wanted to just as an obvious example, that was one I was thinking about. Yeah. I think that's good. And I discussed something very similar, kind of the opposite side of this in one of my points coming up. All right. Number four here for me is what happens if this business just didn't exist? What happens if tomorrow this company doesn't exist? Do their customers break down into complete chaos? Because this really speaks to durability and switching costs.

What if Visa or MasterCard, I'm going to say them together because they're duopoly. what if visa or mastercard i'm going to say them together because they're duopoly what if they just didn't exist like right now what would happen dude it would be like the entire our society would shut down entirely for a hot second until we figured out something else yeah right there is there would be other options but they would take some time to implement. That's for sure. Yeah. Right. Let's think of another example. ASML, ticker ASML, the 180 billion used to be more.

Billion in market cap manufacturer of EUV lithography machines, which is extreme ultraviolet lithography machines. Doesn't matter. I don't need to get into the tech. They have a monopoly and complete stranglehold bottleneck on the semiconductor industry. No more chips, no more manufacturing of foundry capacity comes online without ASML. And so they create a complete bottleneck in the entire industry. And they have a monopoly on it. And the technology is extremely complex. There's over 100,000 parts that go into it.

And so there's like all these suppliers that rely on ASML and upmarket relies on ASML. We've seen what happens when there are shortages of semiconductors. Everyone and their dog hears about it. Okay. If ASML just their entire backlog, just they said, nope, we're not fulfilling any more of them. It would be chaos, like legitimately chaos versus to challenge like your Lululemon thing, which is, yes, I think that they are obviously great for selling clothes, but

if they disappeared, well, for me, it would suck. But like, and for you, it would suck. And my style that I don't really have personally would go away. It would be crushed, but I can pivot pretty easily, right? There's not a lot of switching costs there. And so there's two sides to that coin here. And with clothing, I kind of always say, yeah, you know, if that didn't exist. There'd be other options. There'd be, you know, immediate option, right? Like compared to something that's deeply embedded into the way we live. Yeah.

One that comes to mind that would be pretty devastating for the Canadianadian economy would be any two of the the railroads right whether it's cp or cnr really i can guarantee you we're going into a recession if that happens 100 recession the u.s would too it just would not you know eventually we would recover but there would it would not be quick enough you don't have enough truck capacity to compensate for that and you know the other railway would not have quick enough. You don't have enough truck capacity to compensate for that. And the other railway would not have sufficient capacity to compensate for that as well. And this speaks to how durable those businesses are. Not only would it create an instant disaster if they didn't exist,

but it would also create... There's no quick solution for that either as well. Yeah, that's a great example. I love that one. 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. Bestrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get

started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is Airbnb.ca forward slash host. Number five on our list. So what is the bull and bear case for the company? So it's easy to really get into in love with a company. When you start researching it, you can really get in love with and say, oh my God, this is so good. But I think it's really important to make a bull case for the company, but also make a bear case. So this could, this be something that you could do

by reading some of the reports about the companies, what some of the analysts are saying, notice analysts, what they are saying, not necessarily the price target that I really don't care about, but also going to FinTwit, so Twitter for finances, for those who are not, who don't use FinTwit quite a bit. So you'll see some people giving their opinions about, you know, various companies, they may be, you know, more bearish than you or

vice versa. So I think it's really good to get different perspectives because it can just, just highlight what you might not be seeing for the company yeah that's a good point making a bull and bear case is always smart like it's more so like what could i get completely wrong about uh is important to think about and you can get caught up in your biases if you don't think like that and as for like the platform he's talking about, it's not FinTwit, it's just Twitter. Yeah, exactly, it's just Twitter. It's not, it's just a corner niche of Twitter that I am heavily addicted to.

All right, number six, does this company have pricing power? I'm surprised we didn't launch that up to the first one knowing us. Does this company have pricing power? Yes, kinda, maybe, no. If it's a no or a kind of, I'm not interested at all. It is such a hard... Some of these are nice to have. Some of them are really

nice to have. This is a must for me. It dictates how I invest. And I want to own companies that have pricing power. There's so many good examples of this. They set what the iPhone is going to cost in a boardroom versus the market dictating what it's going to cost. These are such supreme advantages to have as a business when you get to dictate your own prices. Yeah. And if our listeners want to hear more about us talking about pricing power, we did an episode a couple of months ago like 10, 15 businesses, if not more. And we just gave our thoughts. Ranked their pricing power.

Ranked their pricing power. That was fun. Yeah, that was fun. So you can just dig back into the older episodes. You'll find it was at some point this spring. Now, they know that what goes well with pricing power here, number seven. So does the company have a moat and if so what is it so it could be there's really a lot of different kind of modes but just some ideas here is you know it could be

a regulatory moat where regulators basically limit some of the entrance could be network effects I'm thinking a lot of social media platforms here have some really strong network effects. You also have an Amazon or an Etsy, dual network effects with seller and buyers. If there's patents, I know we don't talk a lot about pharmaceutical companies, but that's a pretty big mode for pharmaceutical companies. When they get a patent for a certain number of years for specific drugs, they essentially get exclusivity until it runs out. Or switching costs is another example here.

Is it so ingrained, and especially when it comes to software, I know you're familiar with that, Braden, but are the switching costs and training your staff and everything that's involved with switching to another software, it's so high that it makes it really discouraging for you to do so as a business and even if you were to save money a bit on the software the additional costs that would be for you to switch are just too high so you're essentially there's no advantage for you to to switch to a competitor? Switching costs is actually why I think stratosphere.io, my company, has a really good shot of disrupting financial data upmarket is because the CapIQs, the Bloombergs of the world, they have such high switching costs and tech debt in their stack

high switching costs and tech debt in their stack that it is like impossible for them to update the user experience and the the ux of the actual like platform and so that speaks to how difficult it is to switch off so it can be good and bad but for the for the customers that are deeply embedded into that switching cost is huge. Do you know what, speaking of patents, do you know what that, there's a little thing that people have on their phone case that looks like a pop can that people hand. Oh, yeah. Yeah. It looks like a pop can tab. Yes, I know.

You know, I forgot what it's like, something popped. I know like the ladies tend to love those. Yeah, yeah. Yeah, yes, yes, yes. I forgot what it's like. Something popped. I know like the ladies tend to love those. Yeah. Yeah. Yes. Yes. Yes. It's a specific way that women like to hold their phone with their little like ring pop thing that goes on the back of their phone case.

And it can also work as like, you can stand up the phone. So it angles a certain way if you want to watch something, which is kind of clever. Dude, the guy who invented that has a patent and licenses it out to all of the people who make phone cases and has made like hundreds of millions of dollars. There you go. Yeah. I mean, I'm not surprised. What a great idea. No, but it's crazy. Patents can be very, very strong. If you have a good patent and you have a lot of demand for it, licensing is something you can do definitely. Another checklist here is to just understand the unit economics of the business. So this is like, you know, what is the margin profile?

But like also like what are the unit economics of when a transaction happens? Like where does all the money go to the players in the ecosystem? where does all the money go to the players in the ecosystem? Perfect example of is like how to, how to think about like a transaction that happens in digital payments. Let me break this down for you. If I spend a hundred dollars, okay. Simone, I walk up to you. I want to buy one of those ring pop phone case things that we just talked about. It costs a $100. I know they don't, but for this example, it costs $100. You would take about 98% of that. So you would collect $98 as the one who sells the ring pop thing. And the other $2 are going to go to the players in the digital ecosystem space. About a dollar, I'm making up

rough numbers here because it depends on interchange connection fees here, but of that $2, a little over 60% of it is going to go to the my bank, not Visa, okay? My bank, because they're the ones taking on the credit risk, okay? Another big chunk of it is going to go to your bank, the merchant's bank, for accepting the payments. And then a small fraction, like 0.14%, so like 14 basis points, is going to go to Visa and MasterCard in that transaction. So just me walking like what the unit economics

of like who the players are, what the take rates are, and now what's the margins on that. So in that example, like we have over like 70% EBITDA margins for the Visa and MasterCard. They're taking a tiny little transaction, but the margin profile is astounding. It's one of the best in the entire world, if not the best unit economics of any business ever invented. And so thinking about these things, what the take rates are, who's involved here, who are they paying out in their cost structure, and what does the margin profile really look like, I think is important to understand. This is now digging a little bit deeper into the business. No, that's well put.

Now, the next one, who are its competitors? And I would even add, who are its potential future competitors as well? So if you have a business, you want to understand, first of all, who are they competing against right now? But if you have a high growth type of product that could be very high growth or industry that's really high growth, you have to keep in mind what type of companies and what kind of resources that would be backing those companies that may come in. Something to, I didn't really put an example here, but I think definitely one that comes to mind is just one that I own is Teladoc, right? So the competitive landscape has really changed over the past three, four years for Teladoc. There used to be, it was very fragmented.

Now it's consolidating a bit more. There's still some competitors in place. There's some new smaller players as well kind of joining in. But it's important just to know who those competitors are. And again, obviously understanding the unit economics, like you just mentioned, of that business to make better sense of it. But just understanding who those competitors are, it's really important because it'll tell you whether the company could face some headwinds down the line. Yeah, and you can start to see how these things are related because if the competition is heavy, is it going to eat away at the margin profile of the business? Are the unit economics at risk? Are they going to

compete away on price? That's obviously not ideal. I have one here, which is just like, are they the highest quality business in their category? And they don't have to be, but I like player number one or two in terms of quality because we're trying to own things for a long time and let them compound. And if you're just playing around with the kind of like maybe lower valuation, lower quality names in the space, I think that that's a bad way to go overall. A perfect example of that is like you have Canadian tech serial acquirers of technology companies, Constellation Software or EngHouse. Okay. Constellation Software is clearly a much better run company, in my opinion. I could go on and on, but I think it's pretty obvious. And so why mess around with the lower quality stuff? This is a

mistake I think that I've made in the past and one that I think I've really corrected over the past few years is to just really focus on who are the best names in town? And even if you can get a lower multiple on some of the less quality stuff, I think overall you get worse returns over time. That's just something I believe.

Yeah, I think it's especially hard if you love value investing and that's your bread and butter where these companies like you just mentioned, and I think banks are a great example because you have, you know, banks for the most part, they do the same thing. Yes, there's some banks that their businesses will be a bit different, but at their core, banks are generally, they take in deposit they lend out money that's like the basics of they lend money they lend money that's the basics of most bank but even in canada right we have talked about laurentian bank before and there's a reason why

laurentian bank is trading a much cheaper multiple than its larger counterparts or i'm thinking here of national bank or td or royal, which tend to be higher qualities. A lot of their metrics looks way better, but they look more expensive than a Laurentian Bank. And from a deep value or value investing perspective, people may be tempted to invest in Laurentian Bank, but you have to be really careful because it does not

have a great track record for shareholders compared to the other banks. That's right. Over a long time horizon, I think you got to pay up for quality. That's just my way of figuring that out when you're comparing it, especially against competitors. Well put. Now, the next one, which is a really important one, one that we look at a lot on this show when we talk about companies, it's quite obvious in my opinion, but revenue growth number 11 on our list. This is obvious because you want to see the company growing its revenues on a yearly basis. Be careful of looking at sequential quarters as you may see some businesses that have a larger portion of their sales during certain periods of the year. I think retailers are a great example of this where most of them will get most of their business in Q4.

And actually some of them it's the opposite, right? if you're thinking of Home Depot and Lowe's will be usually their best quarters because that's when people are doing outside work, repairing the house, maintenance, landscaping, and all of that. Compounders will tend to have consistent revenue growth. And although I would be tempted to say stay away from any company that isn't consistently growing, I think the pandemic has shaped that judgment a little bit for me just because you have to use your judgment a little bit here. For example, we saw some great businesses that saw revenues decline in 2020 because of the pandemic only to bounce back higher in 2021 compared to 2019. So I think you still have to, you know, it's not a hard set rule for me. It's a pretty close to a hard set rule. There has to be a really good reason, but I think the

pandemic, that black swan event, I think shaped my, changed my view a little bit on revenue growth. Totally. And this, this is like almost number one for me in terms of like the checklist, which is And this is like almost number one for me in terms of like the checklist, which is, can this company have more sales? Will this company have more revenue in 10 years or five years than they do today? And if I can't easily answer that question, I'm just so far gone out of even looking anything, like looking at any other checklist item here today is just not worth it for me because I want to invest in companies that can grow their sales over time and then also trickle that down into the free cash flow line item over time. It's just so fundamental to invest in

businesses that are going to be better tomorrow than they are today. And with a lot of these compounders that we talk about, that checklist item is easier to cross off when you have these really high quality companies that have been doing this for a long time. Yeah, yeah, exactly. And maybe the last thing I'll add here, some companies, it may be a bit harder. I'm thinking here, video game companies

where they have franchises that will release every couple years it's lumpier i would say for those for me i think some of them actually have pretty good businesses but you have to almost not look at it on a year basis maybe you take a three-year kind of interval and for those three-year interval you want the revenues to keep growing. So you have to use your judgment. This is why they're all pivoting to like the game pass model. Yeah, exactly. But something to keep in mind, maybe you just have to, you know, maybe adjust accordingly if there's these type of businesses that you're looking at. On that growth frontier number 12, I have what is the runway for growth? And so I will literally use like for the

model I use for the companies I cover at stratosphere.io, I literally use like a one to five runway for growth. Let's use some examples here. A company in cybersecurity has a long runway for growth. So like a five out of five. A company like netflix maybe only a three or four three a generous right like probably like a three right but it's like they have a runway for growth but they are hitting saturation in terms of like you know they're not early stages of capturing i'll have to execute quite well too for that yes but it's but it's not it's not like a one yeah yeah it's not a one or a zero because there's still a lot of like the world that doesn't have connection to just internet infrastructure in

general so there is a tailwind for them to keep growing on a global basis. And then to go back to your railway example, you're not going to see product move on rail explode over the next decade, right? It'll continue to compound and be a good business, but it's not going to be a five, right? It's going to be probably a one, if that. And so, I like to look at that runway for growth and more so just to manage expectations. And if my expectations are not being met, then to revisit my thesis. Like if I'm saying Shopify is a five out of five in growth and all of a sudden revenue growth goes down to like low double digits because they get, you know, the competition comes like crazy and, you know, the, the moat in there, the Shopify ecosystem and the partners and the apps isn't as strong as they thought people are just using Wix

or something else. Then I got to think, I got to rethink my, my thesis. And so it's really just to manage expectations for me. And I write it down one to five. And it keeps it simple for me. No, that's great. And I think it's really important to write it down. That way you can revisit some of the things that, you know, if you have a checklist of your own, you can revisit it a year from, you know, starting your investment.

If you decide to invest in making sure things haven't changed. And if they have, then you can reevaluate whether you know you want to keep that investment maybe it doesn't change anything but i think it's always good to write it down now we'll get us start getting into metrics a little more here so this one i think is really important so what is the cash position of the company does the company have a net cash position? Meaning does it have more total cash and cash equivalent than its total liabilities? You'll see that especially in the tech space. That's pretty common when you have some really good tech and profitable like big tech for the most part. They all have I think a cash position,

net cash positions. Sizeable net cash position. Common ratio that is used here is the current ratio, which is current assets divided by current liabilities. If it is below one, it means a company could be in trouble if they have to pay all its liabilities at once. Again, will that happen? Oftentimes it doesn't, but that's something to just give you an idea. If it's below one, you know, there could be some trouble ahead. Something, you know, doesn't mean that it has a not a net cash position, that it's necessarily a bad business that will vary a lot depending on sectors, what kind of business, how steady the cash flows are and so on.

But I still want to have a sense if they do have a cash position and what it is. Yeah. And again, this is quite nuanced, like looking through this lens and then looking at a telecom company, you'll be like, what the hell? Why is there so much debt? And of course, because their cash flows are steady and it's very capital intensive. And so that's how they run their business. But I totally agree. I look at this stuff like, are they in trouble basically? It's just like a quick, quick check. Yeah, because you can see companies that actually don't have a net cash position.

And they also don't have a very steady business. That's when, to me, red flags should start going on. Because you have a company that doesn't have a net cash position. They probably have a lot of debt. Their business is not doing all that well. That's usually not a recipe for long-term survivability. I'll just say that. 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. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm gonna spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while

I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Okay. So I got one here that is kind of connected to some stuff we've talked about,

especially with growth and the competitive landscape. But is the business underpinned by a secular growth trend? And this is kind of the opposite of what you were talking about with the tobacco space, right? Where you're saying the total adjustable market of tobacco is probably in structural decline. It's been in structural decline for a while now. Is there a catalyst that reverses that? Probably not. Maybe there is that, I don't know. But if I was a betting man, I'm saying that it's in structural decline. Secular growth trend driving the business is the opposite. It is in structural liftoff. Perfect example is of the hyperscaler cloud giants. There is huge demand for companies moving their digital infrastructure from private clouds to public clouds or a hybrid cloud approach. The workloads that still exist on a

private cloud is massive. And so there is a huge driver over time from a cost perspective, from a security, from a deployment, from a speed and latency perspective to move your digital infrastructure to a public cloud or hybrid cloud solution. This is a perfect secular growth trend to get behind. It makes investing easier. It makes it a lot easier. And this doesn't mean hopping on some BS electric vehicle, green, what's a perfect example, beyond meat, junk junk secular trend that is unproven it does not mean jumping on those trends because you can get caught up in buying some like overpriced junk secular growth this is real secular growth exactly not to be confused with hype i would say

yeah i think exactly probably more shorter term. More that comes to mind that now it's hindsight, but, you know, around 2010, cell phones. 2010, for those who were looking at secular growth trends, definitely, you know, betting on Apple then would have been really smart because, say, well, I think the adoption of smartphones will keep growing and growing and growing. And clearly, it happened that decade after that. I feel like I have to push back on that a little bit. Because I feel like that's more bet on Apple and the iPhone. Because there was a lot of smartphones that went to zero. Yeah, yeah, I guess so.

It's more betting on the right horse. But it was still a secular trend, I would say. It was probably... Totally, totally a secular trend. Just betting on the right horse, which was Apple at the time. That's right. I'll just go back and put my whole life savings. Yeah, 2020- Where were you to tell me to do that? Yeah, where were you to tell me to do that? Now, next one. So getting back a little bit to metrics here. So how much debt does the company

have? so this is becoming definitely more and more important my view now that interest rates are rising what is the interest rate on the debt and when is it coming due is it fixed is it variable these are all things that you'll be able to find in the annual report or the financial or the quarterly reports when it's released by the company is the company easily capable of paying the interest on its loans so you can get a good sense of where they stand by looking at the interest coverage ratio compared to its peers i think it's really important here because like you mentioned earlier it'll be very different whether a company like apple which apple does have debt

on the balance sheet but they use it more because they can get really cheap debt. So it's an easy way for them and they could repay it all if they wanted in a blink of an eye or versus a utility. It's going to be very different. So you want to make sure you compare, you know, apples to apples and not apples to oranges. And no pun intended with Apple, I just realized. And that will usually the way I like to look at it is the interest coverage ratio is looking at the EBIT or EBITDA divided by the expense. So that'll give you an idea. Again, I don't have an exact ratio for people. It will vary from sector to sector, but you definitely want it to be covered at least a few times, if not more, because then that'll show that yes, they do have some breathing room compared to that interest

expense. And all of these margins are really easy to get. If you just go to stratosphere.io and type in the company, like I'm literally on Google right here, I go to interest coverage and I can see it over time. I can even see what their interest expenses are over time. So for Google here in 2021, their interest expense was $346 million and their interest coverage was well covered. What is it? It's in the hundreds. Oh, yeah. Okay.

I was like, high double digits, but single digit is not. This is an outlier. This is a company that is cash rich. If you look at utilities, I haven't looked at utilities recently, but I think four or five might be pretty common there around that. I'm just going on memory here, but that sounds about right. So if you don't see a hundred times cover, it's not the end of the world, but just- Maybe a bad example. Yeah. Just make sure that they do have some breathing room and there's no hard set number again comparing with peers will give you a pretty good idea of what you know the the ones with the best coverage

is and then if the company you're looking at if it's much lower than that that could give you a good indicator right there here's fortis which is fts typed it on stratosphere.io i got the last 10 years and you know it hovers around three to four and a half basically it was pretty close for this utility yeah yeah that's pretty good for utility actually i think all right where are we here what number are we on simone i was just on 16 management, 16. Here we go. Management. So I don't have really items defined here, but I think it's important to at least consider in this checklist. It's just management in total, like as a whole, which is some questions you can ask yourself, which are like, is management or evolving door if the business is still run by

its founder, which is great. I love that. I love when public companies are still run by their founder as an investor. But is that handoff a concern? We've seen lots of handoffs go poorly. Another question is like, do they hit their targets? And I think this goes into your next one, which is just getting a feel for them on the conference calls. That's pretty easy to do. You can hear the management team talk for 30 minutes. You can hear them talk with analysts for another 30 minutes. Just one, I know you're here saying, listen to a couple of conference calls,

but just even listening to one is a hell of a lot better than listening to none. And so you get a feel really quick, but do they hit their targets is the main thing. Like you can go back to their IR presentations. They can go to their investor relations, go to their 2014. I'm just making up a random number. Go to their guidance and then see like what did they do when they set up their targets for 2018?

And again, just another arbitrary number. Did they hit it? Did they not? Were they talking out of their you-know-what or were they doing what they said they were going to do? No, I think that's a great point. I think the one I would add to management is do they have skin in the game? So if they have a pretty substantial position in the business, and I don't mean like 50%, I mean, just even a couple percentage point is a pretty big position in a business, especially when you have like you're dealing with a publicly traded business where usually it'll be in the billions. So if they in a business, especially when you have like you're dealing with a publicly

traded business where usually it'll be in the billions. So if they have a decent, even couple percentage point can mean a lot of money on the line for them and their incentives are in line with you. Exactly. Now, like you just referenced, number 17, I personally love to listen to conference calls. I listen to at least two full year conference calls and the latest quarterly release this is a minimum for me i will usually do the three full year conference calls like the two is the minimum but three is actually the sweet spot i find and then the last two quarters of conference calls i find it that it's pretty easy to do. I just put the headphones on. I can do other stuff.

And like you said, you can get a good sense for management, holiday talk, just a feel of how management is. The reason why it's so important for me is I can easily identify a few things by doing that as management fulfill its promises. What direction is the company going? How does management answer questions from analysts? What kind is the company going? How does management answer questions from analysts? What kind of tone are they using? Has the tone changed recently? How are things trending for the current fiscal year? What are some of the headwinds or tailwinds

that they are experiencing? These are all things that you can easily gauge from the conference call. Ken, and just the general feel, like how do they communicate with investors is important in my opinion. And so again, like you're investing money behind people who are going to run the company. And so that's important, right? You wouldn't make a private investment in your neighbor's startup without talking with them about their plans for the business. And so treat this the same. Okay, number 18.

Can I get to a place, and I'll make this quick, can I get to a place where I can understand the business well? I'm just looking at a stock and I'm like, am I never going to figure out what this company does? And you got to be honest with yourself. There are lots. going to figure out what this company does and you got to be honest with yourself like there are lots there are times i'm like for sure that i know i'll never or i i just don't have the willingness to get to that point which would take me days and hours and hours and i'm thinking pharma here like you know drugs yeah i'm never gonna get to a point where I know what their drug does better than the competition. Like I have no idea. That's the one that comes to mind the easiest. I was like, can you please dumb it down for me?

And he did a pretty good job. And I still have no idea what Datadog does. Like, I don't even know what they do. It's like, oh, well, they take data and make customer processes better. I'm like, okay, what does that mean? Right? Like, I don't see myself getting to a place where it can be an investable idea. Now, if that changes, then it can be an investable idea. Now, if that changes, then it can become an investable idea. But until then, how am I supposed to know what the hell Datadog does?

That's a good point. Next one. So I had 19 on our list. So review at least a couple recent MDNA, so management discussion and analysis, investor presentation and supplemental information. So you talked about that a little bit just to see if they fulfilled their promises. It'll give you a better understanding of where the company is going and to take from management directly from them. One thing I do like to look at, especially when it comes to REITs here, so real estate investment trust, supplemental information. So most REITs here, so Real Estate Investment Trust, supplemental information. So most REITs will have that. Not all publicly listed companies outside of REITs will do, but REITs will usually have that. So the supplemental information will usually include a lot of non-official metrics or

non-GAAP or non-IFRS information, which can sometimes be very useful for businesses. For example, this is typically where you'll find a full breakdown of measures like AFFO, so adjusted funds from operation or funds from operation for REITs. So that's why I find it especially useful for REITs here. You have to take sometimes these non-official measures with a grain of salt, but for certain types of businesses, they can be extremely useful. Totally agree. Number 20, who are their customers? I don't need a complete list. I don't need to know all 17,000 of CrowdStrike's enterprise customers, but I need to know, do they have supreme concentration risk? Are their customers pretty high quality? A prime example of what you were talking about real

estate investment trusts REITs is looking at their tenant mix right like this perfect example if you are a retail REIT and every property you have has an anchor tenant like Walmart in your plazas that's going to be good than like not than being anchored by some random smb or like a bunch of small like strip mall no it's just you're saying that and i know there were some reads especially mall reads in the u.s that struggled a lot because their anchor right was sears yeah so it could be you have to make sure the anchor tenant is a good one. No, that's what I mean. It's like Walmart. Walmart's my example here. And that's why I was concerned. No, no, no. It was just like this. Did something happen with Walmart? No, no. Sears came to mind and that's kind of the other side of it. That's what I meant. Yeah.

Okay. Got that. Yeah. Yeah. No, exactly. Which doubles down on my point. If your anchor tenants, Sears across the board, are a bit concerned if they go bankrupt and all of a sudden every single property you have is anchored by some bankrupt retailer, that's a concern. For our younger listeners, you can Google what Sears is. It wasn't that long ago. The last ones in Canada, it's been a while.

It was pre-pandemic for sure so if we have people uh you know do you remember sears on their last breath of fresh air they were like actually it wasn't in fresh air they're like oh yeah like going down they closed in canada before the u.s yeah and uh they had a big rebrand. They changed the logo to black with a little Canadian logo for the Canadian stores. They always had that Canadian logo, but they put it back and they tried to make it modern. And they had this marketing plan called What the Sears, WTS. And it was the worst, worst marketing campaign I have ever seen in my entire life. And that was the absolute last ditch effort. It was terrible.

And then they went down. But do you remember what the Sears? No, I don't. That's how good it was. Well, you look that up. I'll keep on going. Yeah, yeah. They put it.

I got some images here. They put it right on the front. And some of the entries in the mall, it'd be like Sears. And then it'd say below, WTS, question mark, what the Sears. Oh, yeah. Okay. So this is what it says. It said, see what the Sears is going on.

So it can come inside. Oh, yeah. Okay. I see it. I mean, I can see what it was but i've never seen god that's brutal right now they deserve so i'll have to say make sure the anchor tenant is not serious so that's um now moving on to uh again a bit more uh metrics here so has the company been consistently free cash flow positive as a, free cash flow is cash from operating

activities minus capital expenditures. You'll find that in the cash flow statements. This is really important, my view, because this shows the actual money that the business is generating with its operations. It's a great indicator to show if the business is sustainable or not. So keeping an eye on that. And ideally, you want the company to be free cash flow positive consistently and that number to actually go up over time. I couldn't agree more. I mean, it's the company actually producing real cash, right? Like that's it. It's an important thing to measure. All right. We're getting pretty close here to the end here. We'll try to get through these. Can the company see in the future at least the magic of operating leverage?

Operating leverage is one of the most beautiful things when you scale a business, which is the fact that software is a perfect example of operating leverage. But say you have a bunch of fixed costs, right? Software is a perfect example of operating leverage, but say you have a bunch of fixed costs, right? And if you add a bunch of new customers or new sales, it doesn't necessarily introduce new expenses. This is a beautiful, beautiful unit economics type situation where reproducing your product or scaling doesn't introduce a bunch of new costs, which produce better margins, more profit over time. So the margins are actually going to tick up over time. As your business grows, your business becomes more profitable on a unit

economics perspective. And that is an amazing thing to happen it's very common in technology because say i have like some application it costs me 50 grand a year to month like 50 grand a month to operate the fixed costs and each incremental customer ad does not change that cost structure so they are pure profit that is the beauty of operating leverage yeah no totally no, totally agree. You can see it in other type of businesses, but oftentimes they may have a bit of a cap. So you'll have kind of a threshold where, you know, between a certain amount of- Some variable costs, but like the, you know,

software is perfect because it's like maybe like no variable costs, but you're right. There could be businesses that the fixed costs are still capped and there's just like slight bit of variable costs that that would also like i'm just thinking a movie theater for example where you know if there's three people watching a movie or it's full you may need a bit more staff

but aside from that your rent everything the heat everything that is necessary for you know running the theater it won't change whether the there's three people watching the movie or you know, running the theater, it won't change whether there's three people watching the movie or, you know, it's completely packed. Which has pros and cons. Exactly. Now, the next one, here's one that we've been talking about a bit more recently. It's always been on the radar for me, but how is the share count trending? So this will tell you if the share count has been staying stable, increasing or decreasing. The biggest alarm bell here is if the share count has been rapidly increasing for a long period of time. It's especially common in tech companies just because they do a lot of stock-based compensation.

But it's something you have to be wary of because that really means if they dilute more, you own less and less of the business over time if your actual share that you own stays intact because it's getting diluted more and more and more. If you see a share count going down, it probably means that they're buying back shares. So, well, it means they are buying back shares to what extent, then you'll have to dig in a little bit more. They could be still doing stock-based compensation, but just buying back shares faster. But that's one that's important because there is unfortunately some companies where I don't have any that come to mind, but you see like basically share count increasing by 10% every year. And it's been like that for like 10 years. Salesforce.

Yeah, there you go. been like that for like 10 years. Salesforce. Yeah, there you go. Which is, you know, at the end of the day, you have to make sure the value they're creating is outpacing the share count increase, but sometimes it can be really difficult to kind of pin that down. So something to keep in mind. Yeah. Like Salesforce example where they've created tons of value, but the share count just keeps like, it looks like a nice revenue growth chart, but it's their share price. I mean, sorry, it's their share count. I don't like to see that. The issue is that that value kind of slows down being created, but their share count keeps diluting.

That's where you can get into trouble, even though the business might be really good. Yeah. Totally. Yeah. And that's why it's useful to look at free cash flow per share trending over time, right? Free cash flow per share over time is what drives value. And you can go to stratosphere.io. You can find that metric because to be honest, bro, I'm not just saying this, like, of course I'm biased, but I find this metric really hard to find before I put it as one of the metrics you can track on strategy.

Yeah. I was used to doing it just manually. Yeah. You can get it automatically 10 years right there there it is a premium metric on a paid plan but it is there okay number 24 here's where things get more into valuation for me which is like you want to buy great companies don't overpay and do nothing but i need to verify that it is at least in my mind a fair fair price. And if it's not, I got to move on. And I've made mistakes before, but I do my best to pay a fair price. Now, if you do your best to try not to overpay, you run into less situations like today where high flying valuations get absolutely smoked. We've seen stocks, high quality, what I would say good businesses down like 80%, a lot of these technology names, because they were not at fair prices. It got insane. 50 times sales is not a good price to

pay for any business. And so there was a lot of crap trading at high prices. And so there was a lot of crap trading at high prices. Tesla is a perfect example for me of, cool, I get the vision, I get the cars, Elon clearly is built different, but I cannot ever get the valuation. It made no sense to me, it never has. And there's so much built up expectation in the price all along the way that I don't know how you make money on it. Now you've made money on it because of exceptional and way not normal, like outlier type execution. And so Tesla shareholders, I give you props. People who work there, I give you props. Except exceptional execution on exceptional expectations. And so it traded at just a trillion dollars in market cap just a few months ago.

And if all of both thesis plays out, they dominate everything they say they're going to do, how do I make my money for the risk I'm taking on? Now, I've been very wrong about this company for this example, and I probably will continue to be, and that is perfectly okay. I couldn't wrap my head around the valuation in 2017. I still can't today. It doesn't mean that it's been the right call, but it's my call to try to avoid getting caught up in overpriced stocks, because the first rule of investing is don't lose money. And this is not a good comment on Tesla this part, but if I'm paying over a hundred times free cashflow or over 20 times sales, it better be a damn good business, high margins and a monopoly or duopoly in nature.

And now I have bought stocks that are way down that were like some software names that were over 20 times sales, like Unity comes to mind and I've lost lots of money on it. And that was a mistake, but that's a really good business. Like it's a really good business with secular trends behind it meets a lot of the other criteria. And it's not like I positioned my whole portfolio in those high price names. Like I think if you look across all my names, it's somewhere between value investor and growth at a reasonable price with a few outliers that I'm taking big bets on. So I got to be convinced that it's at least somewhat of a fair price. Yeah. No, that's a good one. I'll keep going because I think

we're already over an hour. So I'm just making sure people enjoy our voices. Don't get tired of them. Can't use it all at once. Yeah, I get it. Exactly. Number 25, is the company returning capital to shareholder? If so, how? So this can be done through two main ways. So either a share buyback or dividend payment. If it is a share buyback, make sure that they have a track record of doing it at opportune times. The last thing you want to see is a company buying back its shares at the peak to only see the stock slash by 50% after that. If it's a dividend, then how long has a dividend been going? Has it increased over time? Is it sustainable? Does it give them sufficient room to reinvest in the business?

These are all things to keep in mind. And I will say it, I've said it again, be wary of special dividends. They're not guaranteed. And if you factor that in thinking that it's reoccurring, you'll be disappointed because it's special for a reason. It does not happen very often. I totally agree with that. Last one for me here on the list is, am I comfortable

owning this company for at least five years, ideally 10 plus? And this is really a key one for me in how I think about investing and how I think about entering a new position. Even if I'm in a situation, say I'm in a situation where I'm like, I'm not going to own this for that long because I'm going to buy some house in three years or whatever it is. I'm just making up a random example. I still want to be comfortable with owning it for 10 plus years. It's the old Warren Buffett. You don't own a company for 10 minutes if you wouldn't own it for 10 years type of thing, right? And this completely changes the way you think about entering a position and thinking like a business owner, not a business

trader. So I got to be comfortable with that. Yeah, totally agree. And we've been really consistent with that. But that does it for our list. I think it's a pretty, pretty good list that we we drawn up. There are definitely other things that people can add in when they're doing their own checklist. But these are, I think, really good basics to to get started. You'll see. And obviously, there's that's the beauty of investing. There's a lot of gray area. So you have to use your judgment quite a bit. You know, as you've seen, if you've heard us talk, you know, a lot of these things, we don't have an exact number for you because it will vary. That's the beauty of investing. You have to use your judgment as a

whole. Simple, but not easy. Yeah. Thanks so much for listening, guys. This has been an awesome episode, the 25-point stock checklist that Simone and I think about when we are investing in companies. And I think it's a pretty good list. Of course, they don't have to fit every single one. That's pretty high demands. But it's something to think about and hopefully entertaining for you guys to listen to on the podcast. If you're new here, give us a rating on Apple Podcasts and subscribe, follow on the podcast listener. It really helps us and helps you get up to date with what we're putting out. I like Spotify's new thing where if you go to your music and you go to new episodes and it shows all the podcasts that you're subscribed to and if they put

anything out. So that's a perfect example of why you'd want to be following or subscribe to the show. If you have not checked out Stratosphere, stratosphere.io is a good place to find all of this quantitative data and metrics for this checklist. And believe me, I put in the features here very specific to these types of questions to be able to answer these types of questions to make the process easier. Because if you're looking for this stuff and it's taking you a while, that's not going to be very fun. So go to stratosphere.io, check it out. Podcast listeners get 15% off some of the premium metrics for the personal plan with code TCI. Thanks so much for listening. We'll see you in a few days. 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.