The Canadian Investor - Costco, Bombardier and value traps

Episode Date: July 5, 2021

In this episode of the Canadian Investor Podcast, we talk about: Google delaying the removal or tracking cookies and the impact on The Trade Desk Visa acquiring open banking platform Tink Etsy acquir...ing Braziling online marketplace platform Elo7 The big U.S. banks making large dividend increases The differences between limit and market orders Value traps and how to potentially identify them Bombardier and its declining business Costco and its network effects Tickers of stocks discussed: ETSY, V, GOOG, TTD, BBD-B.TO, COST, WFC, GS, JPM, MS, BAC, C Getstockmarket.com Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital See omnystudio.com/listener for privacy information.

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Starting point is 00:00:00 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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Starting point is 00:01:36 So I hope everyone has a good Canada Day. Simon, what are you doing for Canada Day? I think I'll take it pretty easy. Probably go for a nice bike ride. You're on vacation. Yeah, I am on vacation. So probably go for a nice mountain bike ride in the morning and then, you know, have some drinks in the afternoon if we can find a free patio. What about you? Oh, the patios are going to be juiced. I wish you luck. I'll be up at my cottage. We're going to, there's going to be some drinks in our future too. So cheers to
Starting point is 00:02:07 that. Hope everyone has a great Canada Day. All right, let's get right into it. We got some news. I've been getting lots of questions. Why is the trade desk up so much? The trade desk has been in the stratosphere portfolio for a bit now, and it is up 30% this month, including a 16% jump on the news that Google is delaying the phase out of tracking cookies until late 2023, which does affect their business. Simon, can you tell us what's going on with Etsy? This acquisition strategy is really seeming to take hold. Yeah, Etsy is going on a little shopping spree, no pun intended. They recently acquired this week Brazilian online marketplace, EL07, I would think that's how it's pronounced. It's EL07, that's true. Yeah, EL07 is for a total of 217 million, which is an online marketplace that allows users to sell handmade products.
Starting point is 00:03:10 So it fits very well with the Etsy business model. There's 56,000 active vendors and 1.9 million buyers in Brazil specifically. We've talked about MercadoLibre before. Brazil and South America is a huge market. There's not that much online penetration just yet. So I can see this being a very good acquisition. They've also mentioned that they will keep using the brand ELO7. So they'll have it under their umbrella a little bit Berkshire style if you'd like. They buy businesses, they let them run it and just kind of bring it under their umbrella without changing the actual business. The other acquisition they made that was about a month ago, they acquired Depop for $1.6
Starting point is 00:03:57 billion based on last year's revenue of $70 million. So it's not, it's pretty expensive. Depop is a social shopping platform. It's a bit like eBay and Instagram mixed together. I had some fun just researching it yesterday so it's more of for me it's more of an Instagram specifically made for influencer or people to sell either used clothes or some of their own brands. It's really specific to selling, whereas obviously Instagram has a lot of other uses. I know there are Instagram stores, but this one is specifically for selling. It's free to list on Depop, and there's a 10% fee once you sell, and that 10% fee includes shipping costs, so they take care of that. And personally, I've said it
Starting point is 00:04:44 with Elo7 i think these are really good acquisitions they go very well with the business of etsy and i really don't have any reason to not believe management they have a really good track record so far so all i have to say i'm a happy shareholder i'll see how this develops but uh no reason to doubt them yeah they've really i i when they first came out and said we're going to be this house of brands of these this house of brands is what they kept saying in their in their calls and on their earnings presentations and i was like oh yeah they made an acquisition they made an acquisition here but they're like really deploying a lot of capital like almost two billion in the last two months. So they're really getting it done on the acquisition side. And
Starting point is 00:05:29 Depop, I mean, there's got to be such high conversion rates on an app like that. Like you literally go there not only to see what influencers are doing on that entertainment side, but to actually make purchases. And it makes me think of the conversion rates on an app like Pinterest, where if you're an advertiser or you're looking to sell goods, the users that are going on the platform have literally gone there to make the purchase. The intentions matter versus if I go on Instagram, I might just want to watch videos that PGA posted or highlights from last night's hockey game. So the intentions are very different
Starting point is 00:06:16 and it's a really good business model. I've seen a lot of uptake on Depop from Gen Z, but we'll see. Maybe I'm going to have to download it simone i'm gonna have to get with the gen zers i love how the old millennial had to explain to you what depop was i have no i know like i'd heard of it but before this recording you're literally explaining what it is but it sounds like a good idea uh all right Visa did announce a definitive agreement to acquire Tink. Tink is an European open banking platform that enables financial institutions, fintechs, to build
Starting point is 00:06:54 financial management tools, products, and services. This sounds a lot like Visa couldn't get the Plaid acquisition. Visa tried to buy Plaid for $5.9 billion last year, which is similar to this. It's an API banking platform that connects financial institutions. Tink is different, but this looks like Visa. Okay, we had $6 billion to set aside for an acquisition of this API company. Tink's a pretty good target. Let's put 1.8 out there. So I don't know much about Tink. It's a European platform, but Visa is making acquisitions with their absurd pile of cash and the amount of free cash flow they generate. So I expect more acquisitions out of them. Hopefully the DOJ doesn't keep
Starting point is 00:07:45 shutting them down because I am a Visa shareholder. Yeah. I wonder if European regulators will have anything to say about that. Yeah. Time will tell. Time will tell. What's going on with U.S. banks? They're coming out with earnings. They're following the footsteps of some blowout quarters from the Canadian banks. Yeah, yeah. It sounds like the U.S. banks are doing, especially the big banks, are doing quite well. They've all pretty much passed the stress test over there. I can't remember the exact name of the, I think it's a Dodge Frank Act or something like that. Anyways, they have stress tests they need to pass. I'm not a bank expert, but Wells Fargo, they just announced an 18 billion buyback program and they doubled their dividends. Goldman Sachs, they increased their dividend by 60%.
Starting point is 00:08:37 JP Morgan increased their dividend by 11%. Morgan Stanley also doubled their dividends and they're increasing their share buybacks. Bank of America increased its dividend by 17%. And really of the big banks, the only outlier there was Citigroup. They're keeping their dividends steady. I mean, I think they're probably being a bit more conservative. We'll see if they change course in the upcoming year or so. But it really sounds like the banks had put some money, some reserves aside, especially for the pandemic. Now they're able to release a lot of those reserves. They're passing distress tests by regulators with flying colors and they're rewarding shareholders. I think it's as simple as that.
Starting point is 00:09:21 And they're rewarding shareholders. I think it's as simple as that. Yeah, and I had talked about this maybe two episodes ago that the Fed was telling the Canadian banks to fill the war chest, no buybacks and no dividend hikes. And now that, you know, that's going to be allowed again. This is what we're going to see out of the big Canadian banks, too. I'm thinking big dividend increases, man. They're sitting on tons of excess capital, well above that CET1 ratio that we talked about. And if this is a sign of what's to come, I wouldn't be surprised if we see something very similar when we record the next quarter for Canadian banks. So time will tell on
Starting point is 00:10:08 that. Yeah, exactly. And it'll be interesting to see, especially if interest rates start going up, that should benefit banks. It usually does, depending, obviously, if you have the credit risk on the other end that people start defaulting a bit more because of those interest rate hikes. But it'll give them a better opportunity to make money on that interest margin. So the spread between what they're lending people money and what they're paying people out in terms of interest. So that'll be something to keep an eye on. Doesn't matter if it's U.S. banks or Canadian bank. That's always a big source of revenue for banks.
Starting point is 00:10:45 Yep. Well put. All right. bank, that's always a big source of revenue for banks. Yep, well put. All right, let's move on to a segment of limit orders versus market orders. These are the two most common ways to buy or sell stock on your brokerage platform. Limit orders and market orders. Simon, do you always use a limit order i would say um probably i actually i think i do market order more often than not because uh for the most part stocks that i will buy will have high liquidity i was gonna say if it's something super liquid just do it yeah exactly i tend to do that because I've been burnt in the
Starting point is 00:11:25 past where I put a limit order and then I end up not buying the stock for a few percentage points at most. And then it goes up 5% the next day. Yeah. Or in long-term, you're looking back and like, oh my God, how the hell did I miss on that just for a few percentage points? So that's kind of the mentality that I use because I'm a long term investor. If it's highly liquid, I am pretty much always putting a market order in. If it's not highly liquid, then that's when the limit order really comes in. And specifically because there can be a big spread between the ask and the bid. So that's really where I would use the limit order. I've used both before, but I tend to use market
Starting point is 00:12:05 orders more. Yeah, well put. Okay, so let's break that down for a second. When we're saying something that's super liquid, it just means that a lot of shares are trading hands. There's a lot of what you'll see on your brokerage volume. Now, you don't need to be an expert on what is a lot of volume and what's not. If you're an active trader, you'll be familiar with those terms. But really, at the end of the day, if it is a large cap company, chances are there's lots of volume moving on it and you don't need to worry about doing a limit order. I typically do, but you really don't need to. You can run into a situation like Simon's talking about where you didn't execute the trade because you tried to save one penny and then the stock goes up 5% the next day and you're like, wow, I'm an idiot.
Starting point is 00:12:57 Okay, so a limit order is an order to buy or sell stock at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. So if I'm buying a stock and it trades for $39 and I put a limit order at 38, if the stock goes to 38 from 39, then I'll execute my trade. If someone actually sells in that range. Now, sometimes that just might not happen and it might go higher. It just doesn't meet that threshold and then the trade just won't be executed. So that's a limit order. A market order is an order to buy or sell a security immediately. This type of order guarantees
Starting point is 00:13:59 that it will be executed, but does not guarantee the execution price. A market order generally will execute at or near the current bid for a sell order or ask for a buy order price. So all that's saying is there is a ask and a bid that you'll see on your brokerage. There's going to be a small spread. If you do the market order, it'll give you the best price or it'll try to find you the best price, but it'll be executed immediately. Now, typically, you can do a limit order if the stock trades with low volume. Because if you do a market order on a stock that doesn't trade hands very often, sometimes you can pay a really crappy price because you end up just executing and there
Starting point is 00:14:53 might only be one seller or one buyer. I mean, that's super low volume, but these things happen. So if it's a small cap company, use a limit order and protect yourself that way. If it's not, don't worry about it. Just run a market order. I'm talking to myself here because I'm the guy that tries to save two pennies on a limit order. And then I'm just like, what am I doing? I'm holding this for the next 10 years. This two pennies is not going to make a single difference on the long-term performance. So that's a general overview. Did I miss anything? No, I think that's good.
Starting point is 00:15:32 And I mean, I think it's really important for microcaps. So I know we get a lot of questions from people about microcaps or small caps, especially those will tend to have much smaller volume. So you're probably better off doing using a limit order but like brayden said if you're looking at like a medium cap or bigger for the most part i mean by all means use a limit order if you want but from experience i know i've been burned on that before and you know saving a percent or so when you're investing for 10 years it really won't matter in the long run it it won't matter uh and if you do want to do a limit order like say something
Starting point is 00:16:14 uh trades for you know say something like google it's trades for like you know over 2 000 us dollars and it trades for 23 50 and you put it in at 2350 just let it sit for the day if you want to do that limit order you probably should just do a market order because Google is so liquid but if you do just be patient you know the market's going to be open for however many hours left in the day chances are it's going to execute. As long as you're not putting it too far below what the ask and bids are, it'll probably get executed. So just got to be patient. It's like everything in your portfolio. If you just be more patient, chances are you will do better. I think that's a pretty good summary. If you do less you can yeah the last thing is you can
Starting point is 00:17:07 do you can set the time right so you can put until when the limit order is valid for so you could do it for like two months if you'd like i don't think there's a really a time limit right is there i know i've never done it but because there's good till complete, and then you can put an actual time frame on it. If you don't specify the time frame, it'll do good through the day, like to the market close, and then it'll expire. But you're right. You can extend it out on your brokerage.
Starting point is 00:17:38 It'll be different for each brokerage. But yeah. At the end of the day, if you want to own it, just own it. What's the point of saving a dollar? If you want to own the stock, just own it. It's not going to be a big difference in the long term. 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,
Starting point is 00:18:15 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. All right, let's talk about value traps. How did this come to be? We're getting questions
Starting point is 00:18:55 about Bombardier. I think it's because I was talking about Bombardier Rec Products, which is a fantastic business and probably the best asset stripped out of Bombardier. But we were getting questions about Bombardier in particular. And the concept of value traps came up. So talk to me about value traps, Simon. Yeah, well, let's start by saying that it's Bombardier. That's the first thing. Of course. I'm going to mess that up.
Starting point is 00:19:22 Yeah, someone asked me, and sorry, I don't remember. The Twitter handle was probably a couple of weeks ago about Bombardier and with the Canadians doing so well. If we can talk about them in the spirits of Montreal going really deep in the series. And it made me think about value traps specifically because I know we have a lot of people that are value investors on this podcast and that's really something value investors will be susceptible to. You try to find a business that's trading at a really steep discount and you know sometimes there's indicators that says that it may not be a great idea to invest in that even though it may be showing it may be cheap at first glance so what is a value trap and how do you
Starting point is 00:20:12 identify it so first of all value trap will typically have very low multiple an example of this was Air Canada last year when kovat hit when looking at their previous 12 months earnings, Air Canada had a very low price to earnings ratio because the price had tanked due to COVID-19. People were seeing how they were being affected, yet they were looking at the trailing 12 months for profit. So you had a really low price to earnings. So just at the first glance, if you're not doing any due diligence, you're like, wow, this is a a great deal like why aren't people buying that anything i would say as a general rule of thumb anything below 10 p you should examine closely i'm not saying it's not a buy i'm just saying you know
Starting point is 00:21:00 single digits p there's usually a good reason some sectors will tend to trade cheaper than others but if you see something like that that is a very low PE at the very least do yourself a favor and make sure you do a lot of research on that business and why it is that low it could also be a very low price to sales ratio a low price to free also be a very low price to sales ratio, a low price to free cash flow ratio, a low price to enterprise value ratio. If there's really something that comes out super low, it just means you need to do more due diligence at the very least. It should be a bit of a warning sign. If they have a dividend, the dividend yield may look unusually high for the industry.
Starting point is 00:21:46 This is usually because the business is not doing well and management does not want to bite the bullet and cut the dividend. But the market is pricing the stock accordingly. So the market's starting to see that management, whether they want to admit it or not right now, they will need to cut that dividend. And a really good example of that was last year, again, March, April, oil and gas stocks were tanking. Retail stocks, same thing. A lot of them, I remember, they had like 10 plus percent yield. There were REITs as well. Retail REITs were like paying like a 13-14% dividend yield. That's usually a big sign, a big warning sign that market is telling you that a dividend cut is coming. And if a dividend cut is coming, you know, the stock may have tanked. It'll probably tank even more.
Starting point is 00:22:38 So those will be some signs that you're dealing with a potential value trap. And now I'll go on how you can avoid it. But before that, Brayden, did you have anything to add? No, you bring up some good points. I mean, when you invest in a value trap, by definition, you're investing in a company that you think is trading at a deep discount to its intrinsic value, but it's a value trap because the business is struggling in structural decline. It has all these headwinds in the business. The balance sheet is deteriorating. Management is a revolving door. All the classic concerns that a business has.
Starting point is 00:23:27 And let's not kid ourselves. Many businesses that you see out in the stock market today just won't be around in 20 years. And that's an interesting concept that a lot of new investors struggle with when uh berkshire hathaway had their agm earlier this year they showed the top 20 by market cap businesses in 1980 and then they showed the top 20 by market cap businesses of today. And not one single of the top 20 from 1980 was in the top 20 of the S&P today. And that is a powerful concept to understand that there are going to be some losers. There are going to be some businesses that are in structural decline. And even if it trades at six times earnings, hey, yeah, it could be a good value play.
Starting point is 00:24:27 There could be some deep value there. But you're going to really have to have some insight into why the market is wrong. Because the market is wrong sometimes, but it's not always, there's probably something wrong with the business if it perennially trades so cheaply. Do you know what I mean though? And what can happen is when we talk about a business that's growing exceptionally fast, let's use a business like Shopify that trades at a multiple
Starting point is 00:25:04 of some absurd sales multiple like 50. They don't really make any earnings. There's not even a point of talking about PE. And it has always kind of traded in that upper outrageous sales multiple. But the stock's done so well and it's held its multiple because the business is growing so, so fast that maybe in 10 years, even at a 50 sales multiple, it's really cheap. Now, that's just one example. Now, let's think about the reverse of that, of a business that's super, super cheap from a multiple perspective, but the sales are actually declining.
Starting point is 00:25:50 Now, the inverse thing is happening where it's actually super expensive at six times earnings. So when you're talking about multiples, you have to talk about the business quality and the growth trajectory of the business as well. And if you don't factor that in, you will walk into value traps all day long. Yeah, exactly. And when you find a good value in, you will walk into value traps all day long. Yeah, exactly. And when you find a good value play, say you're really looking at a good value play, oftentimes there's going to be a short-term disconnect. It won't be a prolonged, you know, the market's down on that. If it's prolonged, it's usually because there's a good reason for it.
Starting point is 00:26:21 But if there's a more shorter-term disconnect, that's where you can find some really good value plays. One that comes to mind for me is I, some years ago, I subscribed to a service because they had a deal. And then from time to time, I would look at their, you know, their recommendation. And when I really stopped looking at it was because it was recommending AltaGas when it was clear, so clear when you looked at their financial statement that they were going to cut the dividend because they were having 130% consistently payout ratio in terms of free cash flow. There was no way they could keep this on. This service was still recommending them for whatever reason. So when I saw that, I think I had a year left or something after that and never looked at it afterwards.
Starting point is 00:27:19 But what I did end up doing is when they did slash their dividend, I started researching AltaGas even more. They brought in new management. New management had a track record of turning around. They brought in new management. New management had a track record of turning around. And the stock had tanked so much that I started a, I would say, small, medium-sized position. Ended up making something like 75% within a three-month period. Because management had a solid plan. But again, it was a short period of time.
Starting point is 00:27:48 And it goes to show that if I had invested maybe six months before that without doing that due diligence, I would have not had that return. I would have had a significant loss. Yep. That's a perfect example. So now I will give you some points on how you can avoid a value trap. First thing, the easiest thing is just to stay away from deep value investing. That whole Warren Buffett's trying to get a few more puffs out of that cigar butt. So that would be the first thing. But if you do like value, deep value investing, then make sure you know the investment extremely well, since these type of businesses tend to be struggling like we just
Starting point is 00:28:26 talked about so you'll need to identify which one is struggling on a temporary basis and which one is not if the business has no chance of turning things around you really should not be putting any money in it and i cannot stress that enough. So if you do an analysis and you really don't see much probability that they're turning this around, you should stay away from it. Make sure you know management and management as a solid plan and track record. Allocate accordingly if you are deep value investing. Chances are that you'll be right on some and wrong on some. So you want to make sure that you're not being wiped out just because you have a really strong conviction on a deep value play and you end up being wrong. Know when to sell if your thesis doesn't play out.
Starting point is 00:29:16 So if management has a plan and things are still not turning around after a while, you should have an exit strategy. It's better to lose 50% on your investment than losing 100%. And really, I can't stress this enough to have an exit strategy, even if things turn around as planned, whether you want to keep holding it for a long time, or you have a certain price target or certain price metric that you're looking at. So make sure you have a plan. So those are the big things to keep in mind if you want to avoid a value trap. Well put. And it just makes me think of, you have so much capital. You only have, let me rephrase that. You only have so much capital. Why sacrifice quality of the
Starting point is 00:30:08 businesses you're investing in? And don't get me wrong, there are deep value strategies that do work. But those deep value strategies require a fair bit of active management, which just really isn't our style. We'd like to buy great businesses and do nothing. It's that deal, buy great, do nothing. Now, that is a powerful compounding machine. It's probably the most successful investing strategy of all the best investors of all time. And if you do do that deep value strategy, you actually are forcing yourself to do some active management, doing a lot of trades, because what you're trying to do is buy $0.50 and maybe sell them at $0.75 or a buck. So you're trying to buy something that is deeply trading for below intrinsic value, and then trying to sell it when the market puts it back somewhere near its
Starting point is 00:31:06 intrinsic value. Now, this is really hard to do. And you catch a lot of falling knives, like you catch a lot of value traps. And it can take a long time for the market to say, okay, your $0.50 now worth $0.75, or maybe the full 100% of the intrinsic value that you think it's worth. So that requires a few things. That means you have to be right about what you think the intrinsic value is. And that's always not easy to do. And then two, you could just be waiting around, waiting around like, hey, the markets, you just sit all day. You're always so pessimistic because you think the market doesn't know anything. And that's a really easy way to not get investment returns. When high quality businesses continue to do well, continue to grow earnings, continue
Starting point is 00:31:59 to grow revenue, widen their moat, and then you're buying these businesses in structural declines and trying to sell them for a little bit more than what they're trading for. It can work. It absolutely can work. It's just not our style and I think you'll make more money and sleep better at night buying great businesses and holding them for the long term. Well put. And let's not confuse the value investing with value investing. To me, they're two separate things.
Starting point is 00:32:31 You can still find some very good businesses when you're value investing because you're trying to find good businesses trading at discount. These tend to be a bit more turnaround plays like a break. Structural decline. Exactly. Businesses with long-term decline. So just keep that in mind. If you want to try it out, just be aware of the risks and make sure you do your research.
Starting point is 00:32:54 I cannot stress this enough. These are the companies you'll have to turn every single rock over to make sure you know everything about it. And even when you do, you might still be wrong. to make sure you know everything about it. And even when you do, you might still be wrong. Yeah, and let's not mistake those because I consider myself a value investor even when I buy businesses that are growthy
Starting point is 00:33:13 because I think that they're going to be worth a lot more in 10 years than they're worth now. And that's what value investing is. You're trying to buy something below what you think it's going to be worth in the future. And yeah, so I mean, growth and value are attached at the hip. Don't let anyone tell you otherwise. Yeah, well put. 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
Starting point is 00:33:53 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. And now we'll talk about the case of Bonbazier. So this one really, really hurts to talk about it because it was such, you know, back in the day, it was such a Quebec kind of company where, you know, it has a great history.
Starting point is 00:34:50 And we've talked about the recreation vehicles, even public transportation vehicles before. But over the years, unfortunately, Bonbadzi has sold off a lot of their businesses. Actually, most of them have been sold off. So they sold off, like I just mentioned, recreational vehicles. Now it's, what is it again? BRP? BRP.
Starting point is 00:35:10 Yeah, BRP. They've sold off public transport vehicles. They recently finalized the sale of rail transportation. So they sold off to Alstom SA in 2020. And they've sold off their infamous commercial jets the C series which they got a lot of government funding for so what's left with Bombardier I mean not much so according to their own website now they have a strategic focus on business of the aviation basically private business jet
Starting point is 00:35:42 is now their main focus as of of September 30th, 2020, they had $12.2 billion in backlog orders for that. But keep in mind that as we've seen with Boeing and as we've seen with Airbus, these orders can always be canceled, although there is a cost to do so. So they can be canceled, but there will usually be a fee. Airbus and Boeing saw a lot of that due to COVID. Some of the warning signs when looking at Bombardier, and I'm not doing a deep dive here, I'm just showing some of the warning signs that you can see because I consider Bombardier a value trap. So as of March 31st, 2021, So as of March 31st, 2021, their latest financial statement, they had $3.1 billion in cash, $9.5 billion in long-term debt, including $2 billion due within the next 12 months. And that's probably the biggest alarm bell right there, the $2 billion. Because yes, you could look at this, think $3.1 billion in cash.
Starting point is 00:36:42 That's not bad. bank $3.1 billion in cash. That's not bad. But when you look at the debt of $2 billion due within the next 12 months, it will all depend whether they can get that refinanced or not. If not, they'll have to pay that most likely with cash or issue stock, which I don't think is a good idea for them because they've already diluted their stock quite a bit over the years. They have $1.34 billion in revenue Q1 versus $1.52 billion last year. Last year did include their rail division, which like I said, was sold to Alstom. The deal was closed in January of 2021. They had $184 million in gross profits versus $290 million in interest expense. So that's a big warning sign right there. Free cash flow negative for the past 10 years. And I just had a quick look and I copy paste it on the show notes here that we're working off. And Brayden, you can
Starting point is 00:37:41 see it. It's just a it does not look good the free cash flow metric is just negative for the past 10 years that's what it is just negative it's you know some years more negative than others but we're not talking 50 million than negative we're talking minimum their best 10 years in terms of free cash flow negative was half a billion dollars of free cash flow negative. Yeah, that's terrible. I see on the Google Doc here, you posted some screenshots of those sexy 10-year financial statements you can find on Stratosphere. And these are the least sexy 10-year statements I've ever seen. And it's a tough scene looking at these oh yeah it does not look good the 10-year graph on their revenue is like um i mean it went from it would look great if it was
Starting point is 00:38:33 backwards if we flipped the x-axis it would look wonderful yeah exactly so i mean just looking at it you don't even have to dig all that much into it you can just look at the financial statements and you'll see that there's some reds red flags going on right left and center here another thing that's not great is their sure count has increased by more than 30 percent in the past 10 years that's not something you want to see especially not for a low a business that's declining like bombazi and this is all despite the fact that they've received billions in taxpayer money over the last half century. I don't have the exact data for that, but I know it's in the billions. I've seen more than one source on that. So it's, I mean, it does not look good.
Starting point is 00:39:25 one source on that. So it's, I mean, it does not look good. Maybe the governments will step in because I know there's a lot of jobs related to that in Quebec and Canada as a whole. But I'm not sure if you can even count on that. And you shouldn't invest in a business just because you think the government will step in because there's obviously some serious problems with the business if that's your only reason to invest in the business. So if anyone's interested in Bon Batier, I mean, make sure you do your due diligence. But personally, there's way too many red flags and it's too bad, but I would not invest in that business. There are businesses that are so good, it's unbelievable to think in this day and age how good some of the businesses are in terms of margins, growth, crystal clear balance sheets, secular trends behind them. And putting your money in something that is just in structural decline is just not for me.
Starting point is 00:40:31 And before we get a Twitter message saying, yeah, but Bombardier stock is up 136% since the COVID low, don't care. We're talking about something that you want to own for 10 years, and this just ain't it, unfortunately. It's a sad story because think of, you know, this was Canada's darling of innovation and engineering. Too bad. This happens, man.
Starting point is 00:40:59 Business is cutthroat. Business is competitive. And that's good. Capitalism is good, you know. And, yeah, like I said, I grew up up in Quebec so I lived in Quebec my whole life so it's especially hard to look at bon bazi from that lens but it is what it is this is the current situation it's your money and you should definitely when you see a business like that I know it's a dollar 50 or whatever it is I know it's very low it's like a penny stock at this point I know it could look
Starting point is 00:41:31 attractive and we've talked about low price stocks before you know it doesn't mean that it's a good value play yes it might be a dollar 50 or whatever it is it doesn't mean it will, it doesn't mean it will double. It doesn't mean that it will go up. It could go to zero. So just keep that in mind. A low dollar price for a single share does not mean anything. You have to look at the numbers, the valuations, you know, what's going on with the business. And that's what we just did here. Yeah, say for the people in the back. The share price does not dictate anything, literally anything. All right, last segment of today's show. I wanted to talk about Costco
Starting point is 00:42:16 because I've been thinking about Costco a lot lately. I do not own the stock. Disclosure, I do not own the stock uh disclosure i do not own the stock are you a costco member well my family is but i'm not personally i think i benefit from them being costco members because when we go to the cottage we stock up on all things costco and my parents just love it. You know what? When you think about businesses that customers just love, Costco comes to mind. People love it. fan of and they become the marketing team is, is like when you meet someone and they have a Peloton and they let you know in three seconds or they do yoga and they let you know, hey, I do yoga. Don't worry, guys. I like yoga too. But Costco is like that. People love it. Okay, let's talk about Costco because I've been thinking about its network effects. I've been thinking about its network effects.
Starting point is 00:43:27 And it's not a typical network effect. And for those, just to recap what a network effect is, a network effect is the concept of the more people that interact with the product or service makes that product or service actually better. People always talk about social networks as the network effect as a perfect example. Like Facebook, the more people that use Facebook makes using Facebook better. So it's this positive feedback loop as, you know, just compounding over time how good the service is. So when you think about the business, it's really interesting because their mission is to provide the lowest cost for their members. And by doing that, they're actually optimized.
Starting point is 00:44:21 Their goal, their mandate is for the lowest margins possible from a gross margin perspective on their items. Now, that's a weird concept, right? You're looking at around a 10% markup from what they get in the store from their suppliers compared to a Walmart or a retailer. You're looking at around 25% to 30% markup. So that's a big difference right then and there. Costco is set on making sure that the service they provide and their retail warehouse experience provides members with the lowest possible prices. Okay, so that's their mandate. Now, as member counts increase, this is where the network effect comes in. As member counts actually increase, so there's more Costco members,
Starting point is 00:45:21 Costco is then able to go to their suppliers and say, hey, we have X number of members. and say, hey, we have X number of members. And they're going to get economies of scale from their suppliers to make the prices even better. So over time, maybe because of inflationary reasons, prices probably go up. But over time, the value or the actual cost of inflation adjusted are going down over time. You know, how weird is that? That's a strange concept. It's like the opposite of pricing power,
Starting point is 00:45:51 but that's exactly what Costco is trying to do. So suppliers are happy to work with Costco because they have such a positive experience. I'm going to get into the culture later, but they reliably move so much product. They turn their inventory over at an obscene scale and frequency, and they're easy to work with. They can get suppliers to give great pricing with this economies of scale model. The economies of scale gets better as you have more members. This is an interesting? So Costco has operated much differently than other companies. Jim Senegal, the founder, he should be known as one of the best operators in history. He's obsessed with the experience of when you walk into a Costco.
Starting point is 00:46:38 You know, he's famously been found that they wanted to raise the price of that $1.50 hot dog. And he was like, you idiots, no way. There's no possible way we're doing that. So his obsession with the experience and customers and stakeholders is different than most companies, most public companies. They've actually been working with the mindset of a private company while being publicly traded. The people who work there love it. They pay them well, like double minimum wage, well into the mid-20s just for working there.
Starting point is 00:47:20 And on the three-legged stools of stakeholders, you have shareholders, customers, and employees. Now, most public co's value shareholders like the most. Costco has actually been very equal in how they manage that. With the customer experience being obsessive, their employees being treated amazingly, so they are happy to work there. They're helpful to the customer experience being obsessive, their employees being treated amazingly, so they are happy to work there, they're helpful to the customers, and they stay there for a long time. And because customers and employees are treated so well, they believe that the third one, which is shareholders, will be taken care of because of the other two.
Starting point is 00:48:05 Now, this is much different in the way people think about private companies. And Jim Senegal should really be praised for this mindset. And it's a very interesting model. So then you get this high margin membership business that has this recurring revenue. And they really pioneered that membership model. Because of their network effects, you know, they have 800 warehouses and stores. They're just so easily able to increase comps over time and compound and just increase the value of the service they provide over time. And that's all I have for Costco.
Starting point is 00:48:47 I'm kind of mesmerized by the way they look at the world right now. Yeah, it's I mean, I knew it was a great company. I've never really looked at it all that much, but I know they make most of their money to out of memberships and they have a really high renewal rate as well from memberships. I just take myself when I moved out from my parents when I was 23 I got a Costco membership I still use it to this day the same membership I renew it every year and my fiance and I will go to Costco. We've been going a little less often, but that just means it's more expensive every time we go. And the basket sizes are so big. It's like industry leading revenue per square foot in retail and industry leading basket sizes. I mean, of course, you're buying bulk, but they have really optimized the experience.
Starting point is 00:49:49 And after they build a store, they continue, as the store matures, continue to extract same sales growth, like clockwork. And they're just doing a lot of things right. like clockwork and they're just doing a lot of things right. Yeah, yeah, I mean, from a personal experience, I'm not a fan of going just because I find it's always so busy. But yeah, it's hectic. But I tend, you know, what works is you go around that dinner time. It's usually pretty quiet. That's my trick. That's probably pretty smart. Yeah, just because I find people usually later, they're not cognizant of how big their cart is. So they just kind of leave it and then you're stuck. You have to move it.
Starting point is 00:50:30 So I just, you know, I find it's good for... Well, you must be hungry too. So you're walking out with a huge basket size when you're hungry at Costco. Oh, you're stocked up for months. Or get one of those pre-made meals you can just put in the oven and those are so good yeah yeah those pre-made meals are bomb and then let's also just have a quick discussion about how good the kirkland brand is their in-house brand
Starting point is 00:50:57 has a recipe for excellence you know like everything that they have done they they really have a focus on excellence and the kirkland brand is like no other right is that urban legend i don't even this is true but it's like gray goose vodka for the the we don't know actually they they sell um so i went to a wedding in alberta and over there they sell, they have like Kirkland alcohol. Yeah, they do. Which I remember. It's probably just Ontario because of the LCBO. Yeah, Ontario and Quebec. I don't think Quebec has it because I think for them any hard liquor is through SAQ.
Starting point is 00:51:34 But they have wine in Quebec, but they don't have the Kirkland brand. I was surprised when I saw that in Alberta. I was just like, what? They sell booze? Yeah, you Albertans, I'm jealous. I want that in Alberta. I was just like, what? They sell booze? Yeah, you Albertans, I'm jealous. I want some of that Kirkland vodka. But if you play golf, I play too much golf.
Starting point is 00:51:57 But if you play golf, you need to try out the Kirkland golf balls if you haven't already. They're so soft. They have an unbelievable amount of spin for the price. It's just unbelievable. Apparently, this is what they do at Kirkland, right? They snipe, they take, they headhunt like the best person or the top person at some other company and then take them to come replicated at Kirkland. So then you're getting like the best brand's quality.
Starting point is 00:52:21 It's not like you go to the grocery store and you buy like chips.'re not you don't feel good about buying that off brand but you do feel good about buying the kirkland brand right yeah so they've just had this recipe for success yeah they have something good going but uh did you have anything else i feel like we're just rambling on how good Costco is. We're just getting into how good Costco is. I'm hungry now. Thanks for listening, guys. Happy Canada Day. Tomorrow is Canada Day. When you're listening to this, you have already had your Canada Day, so I hope it was good. Go to getstockmarket.com. You go there, redirect to the stratosphere. You see those 10 year financial statements we're talking about. You're going to see if a value trap is coming in with those declining revenues over time. You're
Starting point is 00:53:09 going to see that on the 10-year trend rather than just three years on some other platform. So that's GetStockMarket.com. Thank you so much for listening. We appreciate it and we will see you next week. Take care. The Canadian investor is not to be taken as investment advice. Braden or Simone may own securities mentioned on this podcast. Always make sure to do your own research and due diligence before making investment decisions.

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