The Canadian Investor - Are Buybacks Distorting Stock Prices?

Episode Date: July 1, 2024

In this special Canada Day episode of The Canadian Investor Podcast, we dive into the dangers of speaking in absolutes when it comes to investing. From misconceptions about invincible companies like Visa, Mastercard, and Nvidia, to the importance of framing investment theses around probabilities rather than certainties, we discuss how rigid thinking can blindside investors to potential risks.  We also explore the concept of blackout periods for stock buybacks and their impact on market demand. With companies potentially repurchasing up to $1 trillion worth of shares by 2025, we consider how this practice might artificially boost stock prices and the potential repercussions if buybacks decrease. We finish this episode by discussing stocks that we added to our watchlist. Tickers of Stocks & ETF discussed: CMG.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 Dan’s Twitter: @stocktrades_ca 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  Web player - The Canadian Real Estate Investor Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. 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

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Enjoy that July heat. Mr. Belanger, today we have two segments. You and I both have a segment that we're going to go through. And then our world famous, world renowned stocks on our watch list presented by our friends at EQ Bank. Segment is coming up. I'm doing something a little off the beaten path for my segment and then you have a canadian stock we're gonna talk about yeah who wants to go first i think we both have a pretty decent segment out of the gate here how should we go you go for it while my autonol sinus kind of acts a little bit

and i cough a bit less. Were you wearing that hat with the Dan recording that you just did? I was for a little bit, but I took it off midway because it felt like my head was getting hotter and hotter. The FTX risk management hat is all time. Did you coordinate with Dan Foch for that one? Because he's got all of the bankrupt company hats. Yeah, I think he gets the official ones when they basically go bankrupt. The official.

Yeah, the official air quote. But this is more of a meme hat, I would say. And my trick is to wear it for a couple of weeks and just see how many people actually comment on it. Because we're in this little kind of financial world, right? That's what we pay the most attention to. So that's most people would know what it is. But I'm just curious to see like regular people on the street,

how many kind of notice it or look at it and kind of figure it like know what it is. So that's my little experiment. Maybe I'll report back at the end of July for that. I go to a lot of fintech conferences, and I feel like that would be a great hat because conferences are so serious, and people just want to have, like, conversations with people that they like

and not so, like, serious. And that just sets the tone right away. Like, you know, I've got the FTX risk management hat on. Here we go. All right. My first segment is called speaking in absolutes. Speaking in absolutes means saying things like impossible, never, always. And that type of wording and language and ultimately thinking, speaking in those type of certain ways or what people call absolutes can be detrimental to an investment thesis. It favors biases and ultimately you overlook risks. Like Simone, FTX could never go bankrupt.

Sam Bankman Freed is the smartest guy ever they could you know they are inevitable they are always going to be around them going bankrupt is impossible yeah you know one thing that's uh one quote that comes to mind if people are a star wars fan i think i can't remember who it is but i think it's obi-wan Kenobi who says in one of the movies, only Siths think in absolutes. I think he was talking to Anakin Skywalker when he was kind of changing over. But anyways, I digress. That was my little nerdy plug. Only Siths speak in absolutes.

That's a banger of a quote. I like that. And, you know, it speaks exactly what I'm talking about here. Let's look at a real-life here and then you can chime in, but I'm a shareholder of both Visa and MasterCard stock. I think you are as well. Yeah. Both? Yeah.

Okay. I have been since March, 2020 when I actually kind of bottom ticked them in the COVID crash. That was one of my better moves. I think these are two of the highest quality businesses you can find. From a margin perspective, look no further. There's them, and then there's everyone else. It's truly exceptional. And if I were to say something like it is impossible to disrupt their business, they will always be the dominant way to facilitate transactions in the world between consumers and merchants. Salesforce is always going always be the dominant way to facilitate facilitate transactions in the world between consumers and merchants salesforce is always going to be the dominant crm plan platform that's not an investment thesis nvidia will always be the leaders in gpus is not an investment thesis how about nvidia has a it is it seems to be for a lot of people right now.

It sure is. NVIDIA, how about this? NVIDIA has a huge advantage over the competition with their GPU technology and their CUDA software layer gives them high switching costs and enduring competitive advantages. It gives them the full vertically integrated stack

between the software layer and the hardware layer with their CUDA compiler. It's very unlikely for competitors to catch up. And now that they're building on top of this, they have this huge, huge moat that they're building. Now, that's an investment thesis. Saying that it is impossible to disrupt them and that AMD, whoever else, or a company yet to be seen will never come and disrupt them. That's not an investment thesis. And this has nothing to do with Nvidia, Salesforce, Visa or MasterCard. It's just, these are just examples. Once you have an actual core thesis you can invest from, like maybe that second one, of course, valuation and other things are going to come into play here.

But now you have a foundation to work from. And now you're thinking in probabilities rather than absolutes. The absolute thinking sets myself up for disaster from the get-go. It sets you up for disaster because that language overlooks risk that may exist and probably do exist. risk that may exist and probably do exist. The reality is that the world changes. Market forces, technological advancements, new competitors, new regulations, et cetera, et cetera, et cetera. You know, no one thought, you know, IBM and AOL were going to get disrupted back in the, you know, tech bubble. They were so far ahead. It was impossible to disrupt them.

What was the, was it Netscape was the leading browser? It was theirs to lose, right? Yeah, yeah. Or AltaVista was the leading, or yeah, AltaVista that was a web crawler too, that were back in the day. That's how I was brought up to the internet. Yeah, and people would say things

which seem so crazy now, but people would say things like, people will never stream. People will never stream videos at home. People always go to the movie theater and go to Blockbuster and go get their videos. People will never stream video games on the internet. Next thing you know, you have this Twitch asset that Amazon buys for billions of dollars. You know, people will never do this. People will never do that. It's just, it's just usually wrong, right ironically, the only thing that I can think of that I can

confidently speak in absolutes about is that things will change. So if I know that to be true, then if change is constant, then that sets up my framework for how I can actually think about this. So my thesis can be, I think it's incredibly difficult to disrupt the two-sided network effect, a new entrance building on top of the Visa and MasterCard rails instead of challenging them. Now that's an actual thesis. Saying it's impossible for anything to come along is silly. I mean, you and I both own Bitcoin, for instance. You're much more concentrated, but I own a small piece of it, almost as chump insurance against Visa and MasterCard, which are such massive positions for me. And so for me to say a placement is impossible, something comes along and I lose a lot of money. What happens in 30 years if I'm

tapping a chip out of my pinky finger with some decentralized currency? I don't know. I don't know, right? And so that's setting up the framework about the future is unknowable. So as a roundabout rant and reminder to myself to speak in probabilities and actual investment thesis instead of absolutes when discussing the projections or the future prospects of a company because I know one thing to be true, which is things will change. So if I know that, then that sets me up for my thesis and my foundation moving forward. Yeah. And that's typically how I'll think just because I think for me, it really came about when I played a lot of poker, I studied the game and

you really have to train yourself to think in probability, especially if you're playing, typically there's two types of poker games, right? You have tournaments where it's a bit of different style of play, and then you have cash games. And when you play cash games where you can add more and more money whenever you want to the game tournament, typically you don't, although depends on the tournament. You have to make the best move in terms of probability, even if the outcome is not what you wanted. If you made the best move, for example, if you went all in with 55% chance and you lost, because clearly you'll lose close to half of the time, it's fine. It's a correct move in a lot of circumstances just because over a long period of time, that specific move, if you repeat it 100,000 times, you'll end up making money. And that's how I kind of

view things investing as well. It's something that I found translates quite well. Yeah. That with weighing like avoid risk of ruin, right? Yeah. And so I find it, people have a lot of recency bias, right? In terms of what's working in the market, what- You don't say. recency bias right in terms of what's working in the market what you don't say yeah no kidding right now especially yeah and this actually leads into something on my watch list people have a lot of recency bias in terms of what's working what the dominant player is and then you zoom out and

you look over the last 20 years how many people said blackberry is destined to be you know the forever smartphone in the you know or like late 2000s there that was the clear market leader they owned the business category they owned the like business professional typing emails on their phone category in this new world of smartphones. And that didn't work out. So, you know, stuff changes. And in tech, it changes even faster. I'm looking for things that like have been Lindy, which is things that maybe have not changed for 30, 40, 50 years. And that typically has higher correlation for not changing the future. It's like Morgan Housel's book. It's like a guide to things that don't change, right? Yeah. The chances of things changing with railroads is not particularly high. Maybe index businesses,

credit rating agencies, FICO scores, these kinds of like really ingrained things, those things probably change a little bit less. And they have like that Lindy effect, which is the Lindy effect is basically the concept of if something's been around for 100 years, it has a much higher probability of being around for the next 100 than if something's only been around for five years than it being around for the next 500 very simple concept and makes kind of common sense yeah i mean even one in tech right intel is another one that you know people may younger people may not see that as much but i remember growing up i mean intel in the late 1990s, 2000s, I'd say probably a better part of the 2010s as well, was the main, you know, name in terms of CPU processors. Obviously, AMD came about, I think, in the early 2000s or late 1990s, but they were always kind of laggards that, you know, it was more of a value play versus Intel. You know, if you wanted to have more performance, it was always Intel.

And they even had some cheaper alternative to compete with AMD. But AMD's top processors could never compete. And then over time, that changed. Obviously, a big blow to Intel was when Apple started making its own processors. So the M chips, the M processors. making its own processors so the m chips the m processors but it just goes to show they kind of did not innovate as much as they should have you can also question the business model that they had in terms of being you know their own you know chip designers but also producing their own chips whether that was more of a 1990s 2000 type of model and and now, you know, having more of the chip designer, and then

you outsource the actual manufacturing of the chips is a better model. But it's just a clear example. Like most people would not have thought Intel could be the throne from being the top dog in terms of CPU, in terms of processors. Yeah. I mean, look at, you know, the very famous Moore's law, which is basically states the number of transistors on a microchip double every two years that was made by Gordon Moore, who was the founder of Intel. He came up with Moore's law in 1965. Um, you know, he was born in 1929. He's like the godfather of semiconductors for the most part and this company dominated the space every personal computing they ran every apple device and then you know things changed all of a sudden Apple became a chip designer and the foundry became

completely offloaded to TSMC and the whole industry completely changed. And so we know those things to be true, that things will change. And so that's how I'm setting myself up here. 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 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. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world,

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

All right, next segment here, you have about buybacks here. Yeah, buyback blackout periods, but also the impact of buybacks on actually share price. I don't think we really, like we've talked about buybacks before, right, obviously, but we never looked at it from that angle. And I thought it was something interesting to do. So first of all, the blackout buyback period for publicly listed companies is a specific time frame during which the companies are restricted from repurchasing their own shares. Also applies to employee in a lot of cases. And this period is typically instituted around the release of significant financial information, for example, earnings reports, maybe investor presentations, or annual presentation where there'd be new information revealed. It's just to prevent

any perception of insider trading or market manipulation. The timing will vary, but for most companies in the US, it's approximately two weeks before the earnings release and then 48 hours after. Again, if there's other material release, it could also apply to that. In Canada, what I've found from my research is that there are blackout periods around material events like earnings, like I mentioned, but in general, these guidelines are set by the Ontario Securities Commission and the TSX regarding the actual companies. And then the companies will have their own policies based on that. And from my understanding, and I could be wrong here, companies set their own blackout policies based on the guidelines set by the TSX and OSC.

I will just assume that the venture probably has a lot less stringent guidelines around that but that's just typical with avenger and typically they would fraud is welcome also fraud fraud is welcomed with with open arms as long as you pay the fees right but again like i said it would also apply typically to employees as well to prevent them from trading on any important information. So it's just something to keep in mind because that will definitely on a short term basis may impact the share price a little more. But the more intriguing angle for me is the impact that it has on share demand. And it's very hard to get that data. I tried to look, I couldn't find anything concrete with sources, but I did find kind of general information. So

first of all, you know, there was close to 800 billion of share buybacks done in 2023. Goldman Sachs, and that's for the US, and Goldman Sachs recently said that it could rise to $1 trillion by 2025. I think we're right around there on pace so far for this year. And if you think about it for a second, that's around 2% of the market cap for all US stocks. So if you compare share buybacks versus the market cap, but that's just compared to market cap. versus the market cap, but that's just compared to market cap. Now, if we get into what percentage of the actual demand for U.S. equities for a given year is related to stock buybacks, then that is for sure higher than 2%. I think we can just, you know, I think everyone can agree that it'll be higher than that because clearly, you know, market cap doesn't mean that, you know,

there's an equivalent amount of buyers. So the numbers I've seen thrown out there is it could be as high as 40 to 50 percent. But again, it's hard to verify the data. Obviously, that will vary from company to company. For companies that are more aggressively buying back shares, that may be on the higher end and vice versa for companies that are buying, you know, very little shares. The reason why I'm asking all that is just because it is worth thinking about, you know,

is it boosting demand for these companies? And what happens if the companies scale back the share buybacks, right, that they're doing? How negatively could it impact those share buybacks, right, that they're doing? How negatively could it impact those share buybacks? And clearly, if they're reducing share buybacks, it's probably because the company's results are kind of making them reduce share buybacks as well. So it could be that there's there's more than just that. But I was just thinking about that. I was reading an article maybe a week and a half ago. And, you know, what I tend to do is if I find something interesting, I text myself just so I don't forget for a podcast topic.

But I just started thinking and it's really hard to find. And if someone knows a piece on it that would do a recent piece that kind of looks at this. I'd be, feel free to share it with me. It's something I'd be interested in. But I just wanted your thoughts on that in terms of, you know, share buybacks and how potentially it could impact demand, you know, upwards or downwards, depending if buybacks increase or decrease.

While you were talking, I ran a screen. Okay, so this screen I just put together, it was global companies that are over a billion in market cap who have reduced their share count on a compound annual growth rate of at least 5% over the last 10 years. Okay, that only returns 48 companies. So this is a fairly select list of companies here. There's a fairly select list of companies here. Those names include Lowe's, of course, the Home Depot competitor, McKesson, O'Reilly Automotive, AutoZone, AIG, HP, eBay, these kinds of companies, right? They've just perennially traded at lower multiples.

They think they can compound the stock. The performance of that basket has been pretty solid on a 10-year CAGR. Low has been almost 20%. McKesson's beat the index over that time. AutoZone has as well. There's only five companies on this list of 48 that have had negative share prices during that entire time and these are mostly dying businesses like Herbalife, Xerox, CI Financial, Kohl's yeah that's the whole list actually it's just just a few names yeah the rest have been you know for you know, for the most part, market-beating ideas. I don't know if that answers your question because I was running the screen while you were running it. I mean, it does, you know, obviously, you know, clearly it helps performance. I think you can make the case where it's a good or bad thing, right? Especially, you know, some of these companies, you can also make the case, would they be better off buying a little bit less shares and make sure they're prepared for a rainy day?

Clearly, that's been one of the biggest criticism of some of the companies that were hardest hit during the pandemic, like airlines, cruise lines, where, you know, they would have done like a lot of share buybacks in the years beforehand, but were ill prepared for any kind of adverse event to come up, even though, you know, you can make the case that it was the black swan, whatever. But, you know, there's going to be another event probably in the next 5, 10, 15 years where, you know, it's going to have a significant impact on different type of businesses. And you can make the case that is that the best allocation of capital or could be reduced a bit. And clearly, it can push, you know, it could be, you know, just helping demand for the stock. And if they do reduce those buybacks, that would be just a really interesting case study for companies who reduce the amount of buybacks significantly over time, the change in performance

that they can have. I don't know. It's just, it would be quite the study to do. And I don't think we, neither of us have the resources to be able to gather the data, the time and all that for the research, but it is just, I thought it was an interesting thought process. It's a fairly nuanced conversation. If I back out that number, even from 5% reduction in shares on average over the last 10 years to just four, so just 1% difference, that list goes to 106 companies. So double the number of names come in there just by changing that 1%. Now you have names in like Apple, Oracle, Qualcomm, Wells Fargo, Booking, Citigroups, a lot of the

banks, a lot of stuff that's done exceptionally well, Corning as well, Domino's, Best Buy, MGM, Ally Financial. So I guess what I'm saying is typically if you have that kind of long duration of consistent buybacks, you're talking about really mature, highly profitable cash flowing machines that have multiple ways to deploy the cash. And often with these really large companies, their hands forced a little bit, like what is Apple going to do with the hundred billion that they create every year if they don't buy back a bunch of the stock right like what what what are they how are they going to deploy it and so with a lot of these names it's not just like i'm only going to do buybacks that's like our main capital allocation

strategy we're only going to do m&a so like some companies don't issue any stock because they just focus on m&a or internal growth or some of, you know, the share count goes up over time, as we talked about last week. But many of these companies, like they're just producing these enterprise that are producing billions in cash flow that they can't really allocate every quarter. No, yeah. And it's, no, I agree with that. And it's just, yeah, it's still, you know, it fascinates me just to understand the demand side of it. What percentage would be tied to share buybacks? Let's say for any company that has seen their share count drop by even at a 2% compounded annual kind of reduction rate or whatever you want to call it in terms of reduction. It'd just be interesting to see like how much of the actual demand is attributed to the company buying back its own shares. Yeah.

Since September of 2020, Apple's produced like 500 billion in cash or sorry, 500 billion in operating income. It's pretty good. Yeah. Cash. Or sorry, $500 billion in operating income. It's pretty good. Yeah.

Did 118 on the trailing 12 months, 114, 119, 108, and 66. That's not bad. It's not bad. We'll have to figure out the next big product because that top line can go down forever. Yeah. No, agreed. That's the biggest question with Apple. Yeah.

Buybacks is such a nuanced topic. It's a hotly debated topic. It's one, and it's debated politically a little bit sometimes too, around how should corporations reinvest profits? Do buybacks benefit society? Are they only looking at benefiting shareholders? There are some political conversations around, it's been a hotly debated topic for much longer than I've been alive. Yeah. Oh yeah, definitely. But no, I mean, hopefully people will think about this as well.

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 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. 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. I think we've talked enough about buybacks. You want to get the much anticipated stocks on a watch list presented by Incubay. World renowned. World renowned. World renowned. Yeah. Okay. So I wanted to do something a little bit different here for the pod on my watch list, which was I'm noticing a trend of a segment of the market of growth names that are going higher and higher and higher and higher, typically have some sort of AI flavor or some semiconductor connection.

Those have been rotated into at extreme amounts. And when you have a rotation into those types of growth names, the money's typically coming from somewhere. And typically they're rotated in from other growth names because these are typically growth capital allocation from large institutions, endowments, pensions, fund managers, advisors, what have you, retail. pensions, fund managers, advisors, what have you, retail, typically rotating in, as we know, there's not a huge savings rate in North America these days. Typically, they're being rotated in from other growth stocks. And I wanted to run a screen on stuff that's been growing at a healthy clip over the last three years of at least 15% growth on average over the last three years. So growthy names at a little over 3 billion in market caps, we'll cut it off there, have actual operating income. So operating margin above zero. So that rolled out like half the names and are on a 20% drawdown in the last three months. So the stock is down 20%, but the business is growing. And it gave me a pretty interesting list of, I like a couple of

them. A couple of these are on the types of drawdowns that you look back and go, those are probably an opportunity. The list looks like this. Workday, which is the software company, Ulta Beauty, the makeup company, Molina Healthcare, Celsius Holdings, we talked about Celsius, the energy drink company. It is on a drawdown. The growth has been nothing short of exceptional. Of course, the stock's been rewarded, but it is down more than 20%. Sia Inc., Lincoln Electric, Kinsdale Capital, which I know a lot of people really like, Kinsdale Capital, Solid Compounder. Wise, which is my favorite in terms of highest on my watch list in this list. Wise is a UK listed fintech. Paycom, Dayforce, OpenTex, the Canadian company, Paylocity, Wex, Five Below,

Zoom Info, CleanSpark, and DoubleVerify. If I include the ones that have negative operating margins, you get a lot more FinTech name, growthy FinTech names as well. And so that seems to be a beaten up name. It's like high growth fintech people are rotating into high growth AI. Yeah, I mean, that's an interesting thought as well. I think there's probably some people that are, you know, for the money, I think index funds are probably taking a large chunk of the capital. And because of it, because it's a market cap weighted and people can dive into this there's tons and tons of articles out there very good articles that you know kind of explain the risk of index funds because you know the constant inflows

that you see in these index fund whether it's uh, you know, pension funds, you know, in Canada and the US, when you have a DC pension, typically, you'll have these index funds, and you get paid. And every two weeks, you put money in the same index, and then money flows to the top holdings. And it's kind of this perpetual cycle. And I think that's probably part of it, too, is that capital just flows in and goes to the top names. And then you get names like you just showed that have less capitals flowing to them. But also there's probably a rotation that people are doing as well. Can I tell you a crazy stat?

Go for it. On this topic that you're talking about, there's a lot of momentum built into the market cap weighting names. Like the S&P is essentially a trend following strategy. about there's a lot of momentum built into the market cap weighting names like the snp is essentially a trend following strategy the magnificent seven have so that's what apple microsoft amazon nvidia meta tesla tesla was in and out yeah i, I would say. Yeah. Maybe a missing one. I'm not sure. Those names. I think I missed Google. Yeah. I was going to say, yeah. which is 34% of the S&P 500, and larger than the entire S&P 500 by market cap in February of 2016.

Can you believe that? I mean, it's pretty staggering. I'm not overly surprised just because I've been reading a lot on it, but yeah, it's pretty... That's a mind-bending stat. The magnificent 7 of 16 trillion in market cap. This is from Chris Broomslam's research that he posted. And I looked back and it was like, yeah, and if you look at February 2016,

it's just inches higher than the entire market cap of the S&P 500 in February of 2016. So less than 10 years ago. Wow. Money printing will do that, boost asset prices. Yeah, and concentration at these top names. Yeah. And I mean, there is a question to be asked, right? What if there's, and I think the biggest risk

with that concentration, just a few names, and also, you know, it's pretty much concentrated in one sector, whether you want to divide that sector between communication services and tech, whatever. But let's just say it's one big sector is if there is an event, let's say a recession or, you know, more severe recession, which starts forcing people to draw down on those savings that are all in index funds, that is where the risk kind of kicks in a little bit where you could have a kind of a reversal to the means in terms of being so heavily weighted is now people are selling. Clearly, there's going to be selling more from those top holdings if they're just selling the index. Agreed. All right, let's kick it over to your name here.

Never heard of this company before. Me neither before I did the research. So I wanted to go- Before 20 minutes ago. No, I worked on it, yeah, I think two, three hours this morning. My idea was to try and find a small Canadian company that I found pretty interesting. It wasn't easy because a lot of them are kind of related to energy services, mining, obviously. But this one piqued my interest. So it's Computer Modeling Group, ticker CNG.

It's listed on the TSX. And I'll just preface, obviously, I just kind of researched this for a couple hours. So take it everything like this is more of an overview and we're not I'm not doing a deep dive here it's probably a shallow dive now I'll give an overview of what they are so they're a global software consulting company that focuses on advanced reservoir modeling and seismic interpretation and I'll kind of say what that is. So what this means is their software allows oil and gas company to model where oil and gas deposits are. And according to their investor relations side, they have the vast majority of the market share. When it comes to

these types of software, they have 100% of the super major companies as clients for those not familiar with super majors these would be companies like Exxon Mobil, Shell, BP so those are the like big of big oil companies they're the massive ones and they also have 75% of the top 25 largest oil companies as clients in the world and in September of year, they made the acquisition of a company called BHV. The reason I mentioned that is because I will be talking a little bit about them when I talk about the results. This allows them to license

seismic interpretation software and incorporate machine learning or obviously AI to help decision making. My understanding with seismic interpretation, which I probably have trouble saying that word, but I'm sure people will understand with my French accent. As simple as possible, if I try to explain it, is that it is the process of mapping subsurface areas. So this allows oil and gas company to better know where deposits are and the best methods to extract them. So obviously that's pretty important. And from the brief research I did, I think it's extremely, you know,

it seems to be something that's extremely complex to do. So it's no surprise that a company that does this well would gain a lot of traction with major oil producers. And the CMG started back in 1970 and they went public in 1997 on the TSX. So they've been around for quite some time. So it's more of a, it is a software company, but really specific to the oil and gas. And that seems to have been quite a challenge for oil and gas companies is really trying to

just map what's happening deep underground and being able to better understand how they can access the resources so i can see why they would want to invest in this kind of software because it will definitely pay dividends for them down the line any comments before i get i going. The question I have that I want answered is what the heck happened in like September, 2022 timeframe. I saw you did that. You said they did an acquisition before that. Yeah. But if I look at just, this is, I'm such a visual person. So like, first thing I do is like graph their total revs here and you know hummed along basically at 13 million a quarter for a long time and then or sorry excuse me september 2021

not 22. i don't remember what i said anyways that's that's where there was an actual acceleration in the top line and then it jumped up again on the closing of that acquisition that you just mentioned significantly. But I'm just so curious about the catalyst in that timeframe in 2021 when you My suspicion would be that it was probably because of the oil bear market. So kind of the oil crash that started happening in 2014, where companies kind of scale backed investments. And I'll touch a little bit on that. from, I had some numbers here. So 900 billion invested back in 2014. And now it's been kind of trending more around 500 billion. So my, my assumption would be that company kind of scaled back and probably in 2021, especially after we saw, you know, during COVID basically like companies were like giving away oil, you know, it was below the cost of producing it. And as demand for oil started to pick back up, I would assume that companies probably started investing more into exploration and essentially software like they offer. Do you remember I talked about Pazon Systems, particular PSI on the TSX for one of my stocks on my watch list a while back,

which does monitoring for drilling rigs. Their chart, their revenue charts, even though the numbers are different, look identical. They both provide software for this end market. So I think, yeah, you're looking at something kind of macro here, but that's always surprising to me with a software name. So yeah, I'd want to just look at a little bit more into that. If there's some usage pricing or if it's easy to kind of turn off and on as rigs come on and off, like certain drilling operations come off and on, that affects the actual revenue of these software companies. That's one thing I'd really want to know.

Yeah. So from what I understand, the company does, in terms of their revenues, they'll be more on a annual license kind of deal. So the companies can, from my understanding, they could decide to not use the software. But again, I think it probably is worth their while to keep you know the license active just because it's probably not a huge cost for them and the benefits they can get from it is substantial every time i you know what i just realized so the ticker cmg and i've seen i've seen this ticker before, but I thought every time I saw CMG, that was Chipotle. Because Chipotle is CMG on the-

Oh, it is. Yeah. On the- Didn't even realize. Chipotle Mexican Grill is the same ticker on the NICI. So I think that's why it was tripping me up. Okay. So CMG on the TSX is computer modeling group.

Okay, got it. So yeah, and just to finish here on the numbers, what it looks like. So very small company, $1 billion market cap in Canadian dollars, $109 million in the most recent full year, which ended on March 31st. Revenues were up 47% year over year. ended on March 31st, revenues were up 47% year over year. However, that was due in part to the acquisition of BHV. Excluding the acquisition, revenues were up 19%. And like I said, most of their revenues are via annual licenses. They've had fantastic return on invested capital. So over the last five years, the average is like 30%. So they're doing very well in terms of capital invested. The operating margins, I like to look at that because it gives a good idea at the actual business.

They have been trending down. So they went from 42% in 2020 to 31% last year. Something to keep an eye on if it's a company that's intriguing you. Free cash flow per share, free cash flow and free cash flow per share actually have grown at a compound annual growth rate of 16 and 15% respectively over the last five years. So definitely good to see that. Net income has grown at a CAGR of 3% over the last five years. So not as high, but you know not too bad either dividend they actually pay a dividend of 1.59 percent and the dividend is typically covered at around 50 to 60 percent

of free cash flow so definitely sustainable a bit on the higher end i would say for a software company but the fact that they've been listed for so long and have kind of a core business and obviously they're making some investments with the acquisition and seem to be using more and more AI to help their tools. I guess you can probably make a case that the dividend is not too bad in terms of the payout ratio, but clearly probably wanted to be below 50%. That would be my opinion. The balance sheet is really pristine. They currently have 63 million in cash and zero debt. They do have some liabilities, but those can usually be negotiated, right? Like leases and stuff like that. So very nice balance sheet. The valuation is not cheap, but if growth can continue, it's also not crazy. So a forward P of 35 and a forward price of free

cash flow of 29. So overall, I would say very intriguing business. Like I mentioned, I touched on earlier, we went talking in terms of investment in the oil and gas sector in exploration. You know, it's been down over the last decade essentially since 2014 and i was looking at a kind of piece here that was really interesting from ristad energy and they were pushing back on people saying that the lack of investment could be bullish for oil prices you know in the decades to come because what they're saying and i've heard this before is that yes there is less money being invested nine nine hundred billion 2014 and now around 500 billion however there's an argument to be made that technology has become more and more efficient over time and that the drop in

investment is actually being offset by this advance in technology and I could see a company here like CMG being able to benefit from that in the next five to 10 years as companies are trying to be more efficient with their investments, especially if they're trying to, you know, probably hedge against volatile oil prices, because it's nice and dandy. the if you're spending lots of money on investments if oil you know doubles from here but if oil kind of goes sideways for the next few years or even decade you want to be as efficient as possible to make sure that yes you're still investing and finding new deposits but you also want to make sure that you're not overspending at the same time and if oil prices do kind of go sideways you'll still be profitable but if they do go up you'll have plenty to draw sideways, you'll still be profitable. But if they do go up, you'll have plenty to draw on and you'll have made the proper investments. The thing that I don't understand about these software companies is, you know, like I run a software company. Why is the revenue so cyclical? Like, of course, they're serving a tough macro environment with cyclical

backdrops on the companies who are their customers. Why is it so easy to switch off and on? Quarterly revenue does not look like a software company. I just don't really understand that. Well, it's probably just, I would assume, again again i'm just assuming because i haven't looked that deep here it's probably i would assume because it's a license an annual license they probably just pay like once a year right so it's probably you know i think that would make sense it's just depend on when the license renewal comes up so that's probably why there's a little bit of uh kind of a slick clickle aspect to it i'm not sure but that would be my guess it's actually a little more steady than i actually

you know i take that back actually this uh compared to the previous one i just mentioned yeah this is pretty this is a pretty steady chart actually and they were also fighting like you know the last decade you know not only them but the oil and gas industry like we've you know talked a lot about esg but you know you can make an easy case that the whole push of the esg and demonizing oil and gas in general yeah definitely took a you know had an impact on a company like this, at least indirectly. I mean, at the end of the day, I think the oil and gas production and oil and gas industry, I think, you know, they take some criticism that might be fair, but I think there's also some

unfair criticism, especially when you start looking at natural gas. And, you know, you know, as well as probably anyone, you know, listening to this podcast that, you know, natural gas and you know you know as well as probably anyone you know listening to this podcast that you know natural gas can be a great solution to reduce greenhouse gases when you compare it to things like coal right so it's um and that's oftentimes forgotten in the debate they i've noticed they tend to lump in everything fossil fuel together and not saying that, okay, not all things are being created equal. I like the cyclicality of this business and being able to do M&A and potentially distressed other software names that serve their end vertical market.

It looks like they're doing that here with that BHV name. I mean, I don't know how to stress that. I don't know much about the company they've acquired. But that I actually really like when these types of names operate in cyclical markets to be able to do opportunistic M&A, kind of like a trucking roll-up with TFI or ODFL or XPO. That's their bread and butter, right? Is buying like, you know, when the wave goes out, you go acquire all the distressed assets.

And when times are good, you make all the cash. And then you have that war chest to go do it again for when the downturn comes next, because it does come and um that can be really kind of opportunistic it's it's like it's like when as an investor i actually want to buy cyclical names when they look expensive on a multiple yeah it's counterintuitive you want to buy cyclical names when they look expensive because the earnings are down. You want to buy cyclical names at high PEs, it's so hard to wrap your head around. But when you're at low PEs, you're typically in the cycle. Yeah. And it's usually going to be companies that'll be more conservative when things get,

think times are good. So they'll be a bit more conservative. They kind of realize they're in a cyclical industry. So they'll make sure their balance sheets are shored up. Clearly, they're going to use that to their advantage. They'll make sure the balance sheet is good. They're not making crazy bets. You know, shareholders might be saying like, oh, why aren't you buying back more shares, paying more dividends? But oftentimes they'll, oftentimes they'll just press on the brake knowing that a downturn will come. And then when the downturn comes, they can pounce on those companies that were being too excessive, not conservative enough, and now are in distress or in trouble. And they have to do a fire sale. And then they come in, swoop in, and then longer term, they're definitely the beneficiary from it.

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