The Canadian Investor - 6 Stocks to Hold for the next Decade

Episode Date: September 25, 2023

In this episode, we talk about 3 stocks that we would each own if we were stranded on a desert island and couldn’t sell them for 10 years. Symbols of stocks discussed: ROP, COST, CNR.TO, ISRG, HD, L.TO Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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six stocks for being stranded on a deserted island. You're stuck on the island. You're Tom Hanks cast away. You can only own six names and you're like, oh, the market's closed for me for the next 10 years. What am I going to own? So i think i sent you a text like let's do it and we've done similar types of concepts in the past but uh it should be fun yeah i'm surprised none of us had like either an aviation or you know emergency evacuation helicopter company so at least you they have an extra incentive to save you if you're on a desert island yeah like i'm a shareholder come pick me up it's an interesting discussion because it has important framing and context for a certain, you know, set it and forget it portfolio. Yeah. Stranded on an island forces you to buy businesses

kind of as blue chippy as you can. And as Buffett famously said, don't own a stock for 10 minutes that you wouldn't own for 10 years. And I think it's an awesome exercise to go through your holdings and test your internal conviction. If the market shut off for the next however many years, would you be comfortable owning that business? You know, you can't trade it. You can't be in and out of it. And it's easier said than done. And it's not always the right way to invest either. A shorter thesis timeline than forever, quote unquote, is probably more realistic and more

practical. That being said, three names each. I will kick us off here first. So we'll go back and forth. I'm looking at your names here. The last three are all, I just realized three of them are retailers. Very interesting. You'll notice a common theme here. Very like wide moaty, high conviction that they're going to be around when we finally make it home. Roper Technologies is my first pick. I lean towards owning great conglomerates for this question about which ones I would like to own, because it's almost like cheating. There's so many businesses inside of this one listing. Ideas that come to mind here when it comes to conglomerates, we talk about frequently like

Berkshire, Constellation Software, WSP Global, Procter & Gamble, LVMH, you get the point. It's a holding company of different companies. Very diversified in their business. One thing, one that I think investors would be well suited to own for this type of situation is Roper Technologies. It's ticker ROP, it's U.S. stock, U.S. listing. It's a conglomerate of around give or take 40 companies. They acquire more companies, they've sold some companies over time. And it's interesting because it's not a buy and hold forever conglomerate. They have transitioned to the portfolio, I'd say more to tech than their industrial roots. They've sold

legacy businesses, taken that cash to buy new businesses. And so it's not necessarily a permanent home for the business. It's kind of like private equity here. So they say here that a great business that they purchase has high cash on return, niche, and often very small, vertical or application specific. They want to be the number one or number two player in that vertical. They compete on customer intimacy and not scale, high gross margins, ability to grow without consuming any of the company's capital, and have strong recurring revenue. So nothing kind of game-breaking here, very traditional for things that I'd like to see. And traditionally, Roper, which has a very long past, it's been one of these kind of industrial titans for so long. It's a 50 billion US market cap, almost 60 billion enterprise value.

It's been traditionally a portfolio of industrial businesses. Think of pumps, think of applications of machinery and factories. And they've been pretty aggressively transitioning over the last 10 or so years into owning more recurring cashflow tech companies. If you look at the business here today on earnings per share over the last 10 years, it's grown at a little over 8%, a little bit higher on free cashflow. It's grown the dividend by around 15% a year on a 10-year basis. Pretty solid sustained return on equity, return on invested capital. Margins continue to tick up as they transition the portfolio more to those businesses. It trades at enterprise value to EBITDA of around 22. So kind of a little bit above market multiple.

And I have here how much the application software revenue part of the business has grown over time. That's compounded at almost 20% over the last 10 years, which is obviously phenomenal. double digits all through 2021, 2022. So they've had quite a good run and the stock has just been wonderful to own for a really, really long time. And I don't see that changing. Do I expect a competitive annual growth rate on the stock over the last 20 years for the next 20 years? Probably not. I think that that would be a little bold and you'd be looking at a gigantic market cap if that happened. But you can just based on what they're able to do, invest. They're doing acquisitions in the mid-billions. They bought Vertifor for $5.5 billion just a few years back, which is an insurance software company.

So they're deploying like a ton of capital for some of these deals. So they have a unique position here to be buying vertical market businesses, but deploying an absurd amount of cash into some of these deals. Very cashflow generative businesses. So I think you'll do pretty well owning this one. I've owned it for a long time. And it's one of those things where it's a portfolio of 40 companies. So if one goes away, one dies, probably doesn't take out the whole biz. If one grows exceptionally, you get that upside, but it's not going to be, you know, game-breaking growth. Yeah, I mean, I like the pick. I pretty much know Roper through you.

So, I mean, I don't know it all that well, but I do like that it's not just software, it's industrial. And when we started this episode, I think we were talking before we started recording, the way I approached it is I tried to stay away from anything tech. The reasoning behind that is because, not that they're not great tech companies, obviously there are, right? It's because tech can change so much in 10 years. So let's just think 10 years ago, what it looked like. I mean, BlackBerry was still in the smartphone game and doing decently well. They probably should have pivoted before that point,

so 2013. But that's just an example of a company that was much larger than it is today. And there's countless examples, especially in the tech space. So 10 years, I mean, this exercise actually made me kind of realize that the tech plays I do have, I have strong conviction, but I think my strong conviction is more from a timeframe of three to five years over 10 years, because 10 years, I, you know, I do realize that tech moves so fast that things can change. Companies that are dominating right now could still be there, but not be as dominant. Or there could be companies that we never saw coming that are massive companies that's right and these companies sit you know high customer enterprise relationships and you know very kind of unsexy you know like you don't have you don't have stanford computer

science entrepreneurs excited to pretty much to play maybe any of these spaces. They're not particularly sexy. So it's not really in high-flying, high-growth type technology. But that can be good for investors here. The shares have compounded at 19 point, I'll call it 20% total return if you include the dividend over the last 31 and a half years since 1992 when the stock went public here to September 2023. You've achieved a, call it 20% compound annual growth rate during that time. Those are, you know, Hall of Fame type numbers. Really excellent management team. Yeah, I'll take 10%. I'll lock in 10%. I'm happy with it. Yeah. 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. Well, 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. Now, so my first name, so on that vein, looking at more, I was definitely looking more from

a moat perspective. So the first one is Canadian National Rail. This is one I own. So I kind of tried to use mostly companies that I own because obviously if I own them, I typically want to be owning them for the long term. So Canadian National Rail has one of the most extensive railway networks in all of North America. It spans from east to west coast of Canada. It goes all the way to the

Northwest Territories and goes all the way down from Southern Ontario to the Gulf of Mexico. So they have an extensive network. Clearly, they have agreements with other railways for the areas of the U.S. specifically that they don't have any railways. And for those on Joint TCI, you'll see that the lines in red are all Canadian National Rail Network. So they're definitely very impressive. Same thing goes for CP, especially with their Kansas City Southern acquisition. The two Canadian railways are actually quite extensive in their network, even compared to the ones in the u.s um they're they're amongst the biggest i think a lot of people don't realize that yep no it's such an expansive network here i'm just looking at the image yeah it's pretty crazy yeah it looks like uh the red line

looks like a a bad microsoft paint at it yeah it was an overlay on google maps so i think they just yeah they just did it different colors for the different wellways but um anyways for those not seeing yeah uh the visual like i said east west of canada goes all the way northwest territories and then just imagine there's a line that goes from southern ontario all the way to the Gulf of Mexico. In a nutshell, that's their railway system. And what's really amazing with their mode, and we've talked about this before a little bit about railways, is how difficult would it be to build a new railway? So for any new potential competitor,

that they would have to go through so many provinces and states. And just to think about the regulatory approval that would be required, how difficult that would be to get. If people want an example of what's going on right now, just think about the pipelines. You know how difficult it is to get in Canada or the U.S. to get those pipelines approved, no matter how good the case is in terms of being able to transport energy, whichever it is, liquid natural gas or different types of oil, very difficult to get approved. And I think a new railway would be almost in the exact same boat, because one of the things they do transport a whole lot is oil.

For example, that's one of the big things that people don't necessarily want to go through their province or their backyard. And even if a company or investors would get that approval, imagine the sheer amount of capital required to build such an extensive railway network. And then you add in the cost of getting those locomotives and all the associated equipment with that would be just in the tens of billions of dollars, if not hundreds of billions of dollars to build a competing railroad network. So that's why I think those moats are borderline unpenetrable. But I

mean, I could be wrong, there could be a new technology. And in terms of Canadian National Rail, it's really steady as she goes. So revenues have grown, not as a crazy clip 5.4% compound annual growth rate over the last 10 years, free cash flow and revenues are not going to be crazy, going to go and increase at a crazy clip here. That's normal. You're really getting a lot of value from a CNR, from just a return to shareholders in the form of buybacks and dividend. As just an example, free cash flow per share has grown at a rate of 14.9% over the last 10 years.

They pay a very low payout ratio. Their free cash flow payout ratio for their dividend is around 45%, even lower if you're looking at earnings. They've grown the dividend at a compound annual growth rate of 14% over the last 10 years, and their share count has gone down a whopping 20% in the last 10 years. So you can really see how they've returned that shareholder, that capital to shareholder. And that's going to be a big chunk of the returns for people. The one thing to keep in mind here is that it'll be dependent. It's definitely a bit cyclical, obviously, as the economy goes.

A company like Canadian National Rail will be dependent on that. So if we do enter a recession, they're going to feel it. But as a long-term hold, 10 plus years, that's the kind of company that I would be more than happy to own. It's not without some risk, but I think it's probably on the lower end of that. And you're probably looking, if everything goes well over a 10-year period, and of that. And you're probably looking if everything goes well over a 10 year period, I say total return probably around the eight to 10% range is probably what you're looking at here. It won't be a multi-bagger, but it definitely will just be a staple in your portfolio. This is the ultimate desert island stock. And I didn't take it because I just knew you'd have it.

Out of my railways. Yeah. And so it's the ultimate sleep good at night for all of those reasons you mentioned. Of course, there's not a single equity you can own without risk. But when it comes to infrastructure that's been in the ground for over 100 years, that, you know, unless we blow ourselves up, we'll be in the ground for another few hundred. And I can say that with probably more confidence than maybe any other business in the world, when it comes to these assets, right? There's no sort of incentive structure, as you mentioned on the pipelines. There's no incentive structure to create new ones.

There's no regulator that's excited about it. There's no person who's going to outlay the capital. And so, yeah, for all of those reasons, I think that that's probably a pretty good one to own on a desert island. Next one, intuitive surgical. Now, this is definitely my most risky and probably the most, what I'll say, risky on the list here. I wanted to spice it up here and not just throw a bunch of CN rails at the wall because those are quite obvious. And I don't think it's risky in the fact that it's not a phenomenal business and it has excellent financials and the future is completely unknowable, but more in the fact that this is nascent technology in terms of adoption, even though we're looking at a hundred billion dollar market cap company, like incredible size. And we're talking about here, like the future is

kind of unknowable. I mean, it's really not that much smaller than the market cap of CN Rail. And it's more risky just because the 10 year horizon here is so much more unknowable when you're sitting on a desert island. That being said, of course, the market valuing that highly means that it has a lot more upside. And so I wanted one of these to have significant upside that if I do make it home after my 10 years with my nice tan, that I'm also rich. And then so that has some upside here. Intuitive Surgical, for those who don't know and are new to the podcast, I've spoken about it handfuls of times. It's the leading robotic assisted surgery company with over 8,000 of their DaVinci robotic surgery systems in place. They also have another system called Ion, but their leading product is called DaVinci. They have 8,042 to be exact as

of their last quarter, thanks to the KPIs that we track for these businesses on Stratosphere. And I mentioned here the size here, it's 100 billion in market cap, over 12,000 employees, pretty nice margin structure, not software margin structure, but pretty nice margin structure. margin structure, you know, not software margin structure, but pretty nice margin structure. And, you know, the growth has been given that it trades at almost, you know, 50 times enterprise value to free cashflow or EBITDA and 75 times enterprise value to free cashflow. This is a very, very highly valued stock. And if you look at the growth rates, you're like, how is this thing trading at that multiple? It's not a cheap stock to begin with at all. But the estimates forward for the growth rates here, you're looking at like, you know, mid single digits, high, sorry, mid double digits, high double digits on the top line in earnings per share. earnings per share. But people believe, and I believe, that that can be sustained for a long time, and probably the whole time that I exist on this island. And that's because it is such a nascent industry still in adoption in terms of robotic assisted surgery. They have tons of

optionality in terms of which surgeries they can move into next the more adoption and the fact that it's really really high moat once they win some of those sales for instance you are a a hip you do hip surgeries okay and once you go to there's like 20 000 plus peer-reviewed articles from the industry i probably need a hip surgery after 10 years on a desert island that's what i probably need you'll you'll come right out of your you know your desert island trip and right into the uh the surgery room here and you'll go under one of the da vincis and if you're one of those surgeons you're not going back to the old way it's just so much better using these things and once they're in there it's a true razor and blades and the fact that it's literally

razors and blades that they are selling in terms of recurring high margin stuff that they're selling once those machines are in the hospital. So I think each machine, they don't make that much money on them. I think they're like one and a half million dollars, maybe $2 million each unit. But those things are pumping out lots of surgeries every year. And you need to keep buying instruments and accessories for them, as well as services. So it's the ultimate get in there and then monetize. So the business sits in the future of a gigantic total addressable market. And that's why people are excited about it. It's a long runway for growth, more procedures, new types of procedures, more market share, and of course,

global adoption outside of just really the US that is running the show in terms of robotic assisted surgery. The biggest question mark is the competitive landscape. They have such a large lead and have been kind of de facto innovator and pioneer in the space, but there are formidable competition in Medtronic and Stryker. So the way that I understand it is those are also gigantic, 100 billion market cap companies. The way I understand it is that they're not all competing on the same surgery types of procedures yet, because there's so many different types of procedures that they can specialize in, but it's only a matter of time, you know, until they're, they continue to, you know, compete over the same surgeries and other med and pharma companies have attempted it with limited success. I think I saw Johnson and Johnson was really trying to get into

it. I think I saw that they just fired like 75% of the robotic team. And so clearly not winning hugely there. The good thing here is it's not going to be a winner takes all Simone. It's not going to be a one winner. I mean, they're all trading at such like a hundred billion market cap. It can't be just a winner takes all. Luckily it's a, it's a, it's, it's not winner takes all it's, it's not winner takes all. It's a large growing market. If they maintain their lead, even at this price evaluation, double digit growth could be seen for the whole time on the island for a long time to come. And you can't say that about that many businesses. And that's why I wanted to be on this list. I've owned it for a handful of years now. No, I think it's an interesting pick. Yeah, it definitely is a bit more risk. And one thing I

wanted to mention, especially for newer listeners, like this definitely I agree with you has more upside than I think every other name on the list. But I think it's important for people to remember whenever there's more upside, there's probably more downside too so you have to be comfortable with that whereas a company like cnrel or some of the names you'll talk about there's a higher floor right so even if the company may not have as much upside the downside is also capped a bit more a bit more like a bit like if people are into sports and look at different prospects for the different sports, I mean, you see it in hockey a lot, right? You'll have a certain player. It's like 100% he plays in the NHL. He may be a third line player, but for sure he'll play.

And then you have another player that may be a superstar or will play less than 10 games in the NHL. There's almost like no in between. And that's where you have the high floor versus the high upside so just figured i mentioned that because sometimes people i think get blinded by the upside and forget about the downside yeah and that's what comes down to like portfolio construction right and just like allocation Allocation is important. And risk is not always sexy in terms of actual returns. Because the first rule of investing is don't lose money. Don't interrupt compounding unnecessarily.

The problem here is that not every business in this world has such a knowable certainty around maybe, say, the railroads. Every business has probably more risk than those. That being said, as you mentioned, there's a larger prize potentially at the end of here when you have a nascent industry with a huge total addressable market, aging population, wonderful unit economics, huge prize to be won when we finally come home versus probably a mature known commodity in the rails. Oh, definitely. Yeah. No, that's a good point. I mean, I just wanted, I thought it was worth mentioning. 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.

Now back to the boring businesses and I'll go with Home Depot. back to the boring businesses and I'll go with Home Depot. So you had picked... It's like boring, boring robots, boring, boring, boring. Yeah, boring, exactly. So obviously everyone knows what Home Depot is. So for those not aware, Home Depot has actually more than 2,300 stores in North America. They're spread between the US, Canada, and Mexico.

In terms of mode, I think what they really have is a distribution mode and on the type of items they sell. Because obviously you can buy some of their items elsewhere at a Walmart, Canadian Tire, other retailers. But they sell items that you can only find in hardware stores for example lumber or and they have delivery option which is extremely enticing for both homeowners or do-it-yourself and contractors and they definitely have a very strong pro segment which is the contractor segment and just like Canadian National Rail there is going to be some cyclicality around Home Depot because obviously if people have less money to spend, it's going to affect them. So they may not do the home renovation that they wanted to do, but that's not necessary. They'll probably just focus on what's a bit more necessary at the time if they have less money to

spend. However, I think there's a certain amount of maintenance that homeowners have to do at a bare minimum to make sure that their home is not falling apart. And definitely Home Depot will benefit from that. And one thing I think people probably underestimate with Home Depot, I think higher rates will actually be a potential tell win for them in the medium to longer term, especially if they stay elevated. And I'm thinking here, predominantly US, but maybe a little bit Canada, but obviously most of their revenue and their business comes from the US. So people may not be aware, but in the US, most homeowners will have a mortgage that's typically 30 years. It's not a five-year term like Canada. They have 30 years, mostly U.S. issues 30 year bonds and typically

financial institution when they issue a mortgage they'll kind of compare it to a bond of the same length from the countries they're in. Now what this means is that a lot of homeowners are actually stuck because they're stuck in the house they own because of the low fixed rate they currently have. So the mortgage are not portable in the US. So you can't sell your home, keep the mortgage and apply it on your new home and then maybe get a second mortgage for the difference. You can't do that. So if you move and buy something bigger, you actually have to break your mortgage and then get a new one. So a lot of people would have to break a 3% to 4% mortgage to a 7% plus mortgage.

And if you're getting a bigger home on top of that, so potentially the mortgage is growing in actual dollar amounts, so the principle of the mortgage, with the higher rates, you can just imagine how much more the payments would be. And I was reading an article on Bloomberg that more than nine out of 10 US homeowners imagine how much more the payments would be. And I was reading an article on Bloomberg that

more than nine out of 10 US homeowners have a mortgage rate under 6%. So which makes the decision to move extremely costly. So for those people, maybe like me, they just had a kid, or maybe they're expecting their second child, or you know, they need a bigger place for whatever reason, you're kind of running out of option to actually move to a new place. So you're probably looking at just one option and that's doing an addition or renovation. And I think that's where Home Depot

could really benefit of higher rates. Clearly, if you have higher rates, there's less disposable income with all things being equal. But I think a lot of people will be turning to those renovation. And as a side note here, I think this is one of the reason that, well, it is one of the reason that Buffett invested in home builders in the U.S. It's because homeowners are not selling their homes because of what I just mentioned. So the only new supply of homes or inventory in the US, not the only, but predominantly comes from builders in the US. So that's a big tailwind for

them. I know you added something to the doc here. Daniel Bosh, who hosts the Canadian Real Estate Investor Podcast. I've heard of that guy. If you're not listening, go listen to the pod. listening yeah yeah you've heard about listening go go listen to the pod uh he posted yesterday when canadian homeowners plan to sell their primary residence and this is dated august 7th 2023 so earlier in august and how the times have changed i bet you this graph looked a lot different two years ago. And basically, the results of the poll here asking Canadian residents if they want to sell their primary residence, less than 10% in all of 12 months, 13 months, 24 months, between two and three years, three and five years. More than five years is 41% and never at 31%. What felt like just two years ago, you know, it's basically saying it's not for sale, but everyone has a price. Yeah. Yeah. To I ain't moving, you know, I, I, I'm, I'm not getting a new mortgage. Uh, It's like where people are sitting at right now, depending on where they're at in their term.

And so I just thought that this was a very interesting poll conducted because I have a feeling it was very different two years ago. Yeah, no. And that's that's a great point. And you have to keep in mind, too, from the canadian perspective if you renew your you know your current mortgage so it comes to an end the term comes to an end um you don't have to requalify for the stress test unless you go to another bank even if it's for the same house then you'll have to requalify for the stress test so The reason I'm mentioning that is stress test for a fixed rate right now is around 8%. So I don't know about you, but there's not a lot of people that can afford a half million dollar mortgage with a stress test of 10%.

Like you need a pretty significant household income to be able to afford that. So that's another example. Even in Canadaada the math doesn't doesn't add up in terms of like you look at household incomes and average average home prices especially in the gta here you'll get the client major cities yeah exactly you just won't get approved that's that's that's just a simple way to do it but obviously the u.s it's a different dynamic but at the end of the day probably similar results when you think about it and then just quickly going over for the number especially i and more so if you're locked into something longer oh yeah i mean can you imagine

30 years at like four percent you're laughing but at the same time you're a trap right you can't can't really sell the home but uh you definitely don't have that anxiety to, you know, your fixed rate mortgage coming up term in a year or two and going from three to six or seven percent. Now, the last couple of things I'll say is free cash flow per share has been amazing. One of my favorite metrics of people have been listening to podcasts for a little bit because it takes into account the share count and free cash flow, which I think it's one of the better metrics. It's grown 14.7% over the last 10 years. That's a compound annual growth rate. They've returned tons of money to shareholders. They pay

a decent dividend. It's grown 19% over the last 10 years on average. And the payout ratio varies quite a bit from year to year, but very sustainable. Share count has gone down 27% in the past decade. So lots of buyback and revenue has compounded at 7.4% over the last decade. It has leveled off a little bit in the past couple of years because of the big pandemic boom that they got and people just spending on their home because they couldn't travel and do anything else. It's not going to be a big growth couple years because of the big pandemic boom that they got and people just spending on their home because they couldn't travel and do anything else. It's not going to be a big growth name similar to Canadian National Rail. You're going to be getting most of your return out of returns to shareholders via buybacks and dividends. But again, I think it's a really good name to own.

And I think they could actually get some tailwind out of those high interest rates like we just talked about. Yeah, we're talking about kind of like things in short, medium term when it comes to the macro. And the reality here is Home Depot is a phenomenal business. And over the next 10 years, I don't see anything where it is not a phenomenal business. I don't see anything where it is not a phenomenal business. No matter where supply is, interest rates are at, appetite to do renos are, those things kind of come out in the wash on a long time horizon. And I've been in Home Depot like three weekends in a row. I've been doing lots of chores at the cottage.

And you know what? I'm contributing there you see to see their next quarterly print and uh you'll see you'll see my uh visa statement on there and i was gonna add if it was an easy business walmart amazon would already have you know tried i think they're smart enough to realize it's just not worth it there's home depot and lowes and a bunch of smaller uh type of um what are they called again these type of stores sorry i'm king carry is the word in french that's why i was like hardware stores like what home depot hardware sorry i was looking for the term i'm like uh yeah so there's a bunch of fragmented and then there's Lowe's and Home Depot. That's it. That's right.

And Rona here in Canada. All right. You have one more. I got one more. This is the second half of today's show is the big box. The big box retailers. We got Home Depot. We got Costco.

I've had a conglomerate tech company here. I've had a medical devices company here. It's time for my boring blue chip here, Costco. And the ultimate sleep well at night stock here. I can focus on finding my way off the island or making faces on volleyballs, Tom Hanks, cast away style, because I won't have to worry about Costco in the portfolio. Now, yes, the valuation is not cheap. I think in the short and median term, it's actually kind of an uphill battle in terms of modeling some market beating returns. But it deserves to trade at a premium because you can go to sleep at night knowing there's still a lot of growth left in this story, believe it or not. Not necessarily in our backyards, but internationally.

Chinese store openings have been wildly successful. They now have two open. Their first location opened just in 2019. They've been tactical. They've been patient. And now there's a third one under construction there. They have Canada alone, for instance, for context, has over 100 locations. There are 853 warehouses as of their latest quarter.

And total cardholders is, what do we got here? Like 120 million, a little 125 million-ish here on Stratosphere. And those are numbers that, sure, they're growing mid-single digits, compound annual growth rate. But you look at the opportunity that they still have in terms of their global expansion, the moat that they have, the fan customer obsession, the wonderful long-term management, and the fact that they can keep hiking membership fees that they have not done in so, so long. So we've been doing this whole podcast for what, three years now. And I've been talking about this, this membership price

hike that has still not come, which is kind of crazy to believe. And I think they're well over, I mean, well, we know they're well overdue on one year, but it will happen. You know, if it can happen, it will happen. We have a very patient long-term oriented management team here. You can tell in the decisions they make, how they run the business with, you know, the three-legged stool kind of flipped up

on its head with shareholders last, employees and customers first. And it's a completely different way cultural wise to run the business where you basically have this hierarchy of public company, serve shareholders first, and then some order between serving customers and serving employees. Flip that on its head. You serve employees first. You serve customers with a tremendous experience, this network effect, this flywheel that keeps making the service continually better for customers in terms of cost. Even amongst inflation, you're still getting that value proposition. And that feeds through to wonderful shareholder returns. And it certainly has. I mean, you cannot knock on them for this style of management because

it 100% has rewarded shareholders. I think Costco shareholders would do quite well. If you buy the stock today, don't be surprised if it does nothing for five, six years. You can't be given the growth rates and what trades it like 40 times next year earnings or something ridiculous. Let me find out. It's always expensive, Costco. It's always expensive, right? What do we got here? It trades on a forward PE of 36 and a half. So that's next year's earnings estimate on a trailing 12 month earnings. It's trades at a PE of 42. Now those numbers are found lots of places in the market, but not for companies not growing extremely fast. You've had a five-year revenue growth rate, companion growth rate of 11%, which is certainly nothing to sneeze at for a company of this maturity and size and wonderfulness, for lack

of a better term, but it's still a very expensive stock. So don't be surprised if a trade sideways does nothing for many, many years, you'll be just fine on your desert island. Yeah. And I think just the one thing you didn't add, but we've talked about it before for Costco is most of their profits don't come on their margins. They actually come from the membership. so i think that's one of the reason why now they're trying to probably crack down on people using friends or family members membership card and using the self-checkout i think they weren't really checking before now they've started doing that uh so but that's basically how they make most of their profits

or it was a big brain move but they're like, okay, we're going to have a period of pretending not to care. And then when we crack down on it, all these new people who are hooked on the world of Costco will have to go buy those executive memberships. Yeah. And I mean- Who knows? Yeah. And we talked about Dollarama in the last episode with how people are feeling the pinch

of inflation and going to dollarama more and i think costco is the exact same boat for different segments of the population clearly i think you'd probably find that costco has higher income households shopping there just because the cost of a membership but if you can't afford the cost of a membership and obviously you have a car you can actually get there because good luck going to costco and calling an uber because it won't make a lot of sense um or a taxi but um i think they should benefit from that i think they should pre i think they'll probably see their membership growth continue in north america because people are trying to save money i've fully bought in uh as a customer i'm fully

i'm fully on in the cult i am you know ever since i moved out from my parents i'm a card carrying member of the cult yeah i mean i and the best time to go at least in ottawa um it's when it opens if you go on the weekend because they actually open half an hour before their stated time so when it opens there's a lineup at the cash. Hey, you can't be giving away those kind of tips. Well, that's fine. That is secret sauce. So when they open, I saw them a couple weekends ago because I went for my daughter's birthday to buy a few things.

And literally, they were opening at 9. There was a lineup at the cash with people done their shopping. opening at nine there was a lineup at the cash with people done their shopping and then if you get that open once you're done your shopping there is no more lineup because all the early birds that go there before it officially opens are already out of the place that's a trick yeah now i know yeah i another trick too by the way you can get the people don't know this you don't even have to be a member to order like at the restaurant like you can get one of those pizzas or oh yeah that's right yeah on the way to the cottage or something you don't even have to have your membership with you or something you can still go in there all right last one here we got another uh another grocer it's been we've talked a lot about grocers

on the podcast lately yeah and i'll do it quick uh just because we talked about it on the last episode for the whole uh thing that the government brought in the large grocers in Canada to try and get food prices down. So it is a loblaws. The reason, you know, I would like to own that for 10 years. Clearly there is some regulatory risk

like we talked about in the last episode, but, you know, they do have some big tailwinds. At the end of the day, our population is growing rather quickly right now. And those people have to eat. And there's just a handful of large grocers in Canada. And Loblaw is definitely one of the biggest one, if not the biggest one, even if you factor in Walmart and Costco.

I still think they're the largest. By market cap. Well, I guess you can't but by canada segment even if you look at sales right yeah let's i yeah and and and and in my opinion uh pure play grocers canadian listed only uh i think it is the premier one to own in my in my opinion i would say semi pure play because they have pharmacy right that's right so they have shoppers which is about 30 of their revenue for those who weren't aware so it's definitely uh you know a decent chunk and i know that's one of the things they've been

saying when the government's been asking about like higher prices is you know that our best margins are actually coming from the pharmacy, not the food segment. It's still 70%, obviously, or just a little less than that, because they do have a small portion that is their financial services arm. But that's just a couple basis point, it's basically a drop in the bucket for them. You know, Loblaws has had like, pretty impressive free cash flow per share growth over the last 10 years they've grown that at almost 11 percent per year the pricing power they have i think everyone kind of knows it's limited but what really makes them stand out i think it's their distribution they have 2400

stores across canada between all their various brands including loblaws shoppers no frills maxi in Quebec, Previgo in Quebec as well. They're just the Quebec equivalent of some of their other brands. Their free cash flow margins are actually the best of all Canadian supermarket chains. Their gross margins are also the best of the three big Canadian grocers, although Metro has slightly higher operating and net income margins, Empire, for people who want to invest in the grocers, you'll see that Empire on all the margins,

Empire is by far the worst. And they've compounded their dividend at 6% over the last 10 years. And they have a very low payout ratio for their dividend. It's 15% of free cash flow. It's a bit higher if you look at net income, but nonetheless, like it's very sustainable. Clearly, you know, there's some pros and cons here. But for a company to hold for the next 10 years, that will still be here and should provide some, I think, at least market equivalent, if not slightly market beating, like I think Blah Blahs is a solid name to own. Again, I came at it with, you know, a company for me that's a certainty that it'll still be there in 10 years.

And I think there's a high floor and a decent ceiling, not a super high ceiling, but something that will be giving decent returns, at least for my portfolio. No, I think it's a solid name, and I think it is the premier one to own. Speaking of shoppers, dude, I went to shoppers to re-up some vitamins. Talk about inflation hitting somewhere hard. Dude, I'm going to have to go on food stamps to buy vitamins dude it's unbelievable how much those have like doubled i swear and like

since the last time i went in it's it's i i don't get that like what's what's with the shortage of we do have a shortage of vitamins or is that where they're just capturing all their margins since the government's telling them they can't food anymore? Yeah. I mean, yeah, I think that's, they're not shy about it. The pharmacy business has better margins definitely than the food business. Yeah. Yeah.

I have no doubt of that. Thanks for listening, folks. I think people are getting the gist of it here, right? Thanks for listening, folks. I think people are getting the gist of it here, right? It's like, we want to own high quality businesses with some upside, sometimes more than others, that you're not going to have to worry about because the market's closed, you you and I invested, our portfolio would basically be a collection of these names. Now, we own some of them, but it's not the only way to invest. We have some names with much shorter time horizons, three, five years, especially with this higher flying tech names. But it's an interesting exercise to think about. It makes you test your conviction. It makes you think about the longevity and the competitive advantages the business might have. And I think it's a useful exercise to go

through for every single holding that you own. It doesn't mean, if it doesn't answer the 10-year test, it doesn't sell the name, but it might have you thinking about your conviction other names here i was really thinking about putting in were the waste businesses like a waste management waste connections gfl last time i checked garbage collection isn't going anywhere and still highly fragmented i think that you actually get some pretty decent upside when it when it comes to consolidating that that industry in north america alone so other other notable mentions there i was thinking about blockbuster but i heard they went bankrupt about a decade ago so i was thinking blockbuster was on your list yeah but that almost made that it's an example of like

blockbuster probably within a decade right went from like pretty high flying to dead um that and was disrupted by technology so that's just you know something for people to remember and you can do quite well with these like boring businesses that have like super strong modes but if you're looking for multi-baggers probably not gonna happen with these but you're gonna have probably market beating returns if you pick the right ones here other notable mentions here i thought about doing visa mastercard i mean there's lots of lots of ideas here um i thought about those i thought about a nutrient that's more cyclical but again banking on world population growth um there's

always going to be a need for food like i kind of i really looked at the necessities that's where i looked at a lot yeah right like the only thing in this world that's constant is change but there's a few sectors where you're like yeah that the future probably looks more like the same than it does different and i think that's a good summary of today's list. Thanks so much for listening. We appreciate you guys. We are here Mondays and Thursdays. If you have not hammered five-star review, left us a nice little review, give us that dopamine hit, we so deserve and crave, go ahead and do that. And if you have not subscribed to a stratosphere paid plan and get 15 off with code tci we'll be back next week we'll be back every week and we're gonna have some big news you're not back next week i'm back next week with a couple of interviews yeah that's right yeah so don't be don't be scared if you don't hear brayden it's planned it's planned yes you know yeah the we as in the

show the show goes on baby we'll see you in a few days take care bye-bye the canadian investor podcast should not be taken as investment or financial advice brayden and simone may own securities or assets mentioned on this podcast always make sure to do your own research and