The Canadian Investor - Destruction at Coinbase & Cannabis - Earnings Roundup

Episode Date: June 23, 2022

In this release of the Canadian Investor Podcast, we cover the following earnings releases and news: U.S. Fed increases interest rates by 75bps Layoffs across trading platforms Adobe earnings Canadian housings cooled down again in May Canada to ban some single use plastic items Hexo earnings Enghouse changing business and why Braden sold his shares TSX continues to outperform its U.S. counterparts   Tickers of stocks discussed: HEXO.TO, ADBE, ENGH.TO Our Website Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Check out our portfolio by going to Jointci.com Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense. Check out the Yes We are Open Podcast from sponsor MonerisSee omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. Live from the great white north, this is the Canadian investor where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. My name is Brayden Dennis, as always joined by the legendary Simon Belanger.

Today is June 21st, the longest day of the year, which is a great thing. Simone, you can't really see right now, but this sound attenuation setup I just put up, it looks like I built like a fort around my office. You know, like when you're a kid, you have like a sleepover and you're like 10 years old and you build a fort. That's what I got going on right now. Move into the staging business for home sales in Toronto. Dude, if they saw this, I don't think I'd sell any homes. Speaking of that, we're going to talk about home sales. Wow, look at that segue, Simon. We were getting professional at this. We got a news roundup for you today. We're talking

interest rate hikes, some layoffs in Canada. We've seen the financial sector. We're going to talk about some earnings from some companies that are giving us something to talk about. And yeah, let's get into it. And I mentioned home sales too. So let's do it. Simone, the US Fed made some moves. This was, I guess, last week, but here we are. So the news came out that the Fed increased its interest rates by 75 basis points. So set basis points would just mean 0.75%, which is quite a large increase. And you heard it here first because we recorded the day before and I was saying that sounded what like the Fed would do.

Of course, most analysts and professionals were saying that it would be the case after the inflation print came out. So the consumer price index or CPI came out at 8.6% for May, which was actually quite higher than expected. And the markets went down sharply after the Fed announcement, and they were flat on Friday. So the markets are nervous about the economy and where it's going. After the rate hike, Fed Chairman Jerome Powell said that their number one priority was to get inflation under control. It's hard to disagree with that, but by doing so, the markets are nervous that those rate hikes will cause a recession. You don't have to look too far for that kind of approach. If we look back in the 1980s, that's what the Fed did. And they did inflict a lot of economic pain, but they did get inflation in check eventually. I don't know if they'll go to that

extent in terms of what they're going to do, but they might have to if they really want to get it under control. And for those who are a bit newer to the show and investing in general, when central banks increase interest rate, it makes the cost of borrowing more expensive for businesses and individuals as well. So that typically will mean less spending, which in turn will lead to a slow down in the economy. It may not lead to a recession, the true definition of it or not, but it will probably lower the growth rate at the very least. Yeah. I mean, when it was coming, this was a pretty aggressive hike and you were on the money with your little prediction there that you had when we were recording.

Do you mind for the listeners, like obviously you and I know what it is, but we met some of the wonderful people who listened to this show in person for some drinks and a Blue Jays game this past weekend. And one of the questions from the group was, what does it officially mean to be in a recession? Because there's this like arbitrary definition. Do you want to answer that for us? arbitrary definition. Do you want to answer that for us? Yeah. So the official definition of a recession is two consecutive quarters of GDP contraction. So GDP is the gross domestic product. It's essentially the sum of all transactions, services, and goods that happen in the economy during a quarter. If you have

two quarters where it goes down, you're officially in recession. A couple issues there. The first one is we always know after the fact. Yeah. Very lagging trailing indicator. Exactly. So we could very well be in a recession right now and not know until a couple months from now. We don't really know. The other issue too is the growth is always calculated based on the output of the economy. So it's not adjusted in terms of inflation. So you can make a case that even if we're not in a recession, say our GDP is growing at one or two percent right now in terms of the quarters, while we're still behind of what it would be if...

It's not real GDP growth. Exactly. So when you factor in inflation and the cost of everything going up, you can make a case that even if it's growing at a rate of 1%, we're actually in a recession in real terms. So that's why I personally take those metrics with a big grain of salt. Yeah. And it's a reminder that if you are a long-term investor, you will face recessions. Not just as an investor, just as a person in the economy, you will face recessions. It is normal expansion and contraction of the economy, yet everyone is shocked when it happens. They're like, oh my God, look at my portfolio. But you signed up for

this, right? This was part of table stakes. Okay. One more section from here you hear, because I saw you put this in the notes and I think it is noteworthy news, especially given this crowd of the people who are listening to this podcast. what's going on with these platforms? I mean, we've seen absolute destruction. I saw a hilarious tweet, by the way, which was like a play on all the remote jobs. I think I was telling you about this on Saturday when I saw you when you were here in Toronto, was someone made me a good chuckle. They said, oh damn, I got fired from all three of my remote Coinbase jobs today. Yeah, I remember that. That is hilarious. But what's going on with these platforms, both on the equity side and the Coinbase crypto side? Things are up for a shakeup right now.

Yeah. So there's been a lot of news about various stock investing platforms or crypto investing platform cutting costs recently. There's been some recent examples with Robinhood starting in April. They laid off approximately 9% of their workforce. Then we saw in the last couple of weeks, Wealthsimple announcing that it was cutting 13% of its staff amidst market volatility. Coinbase is also laying off 18% of its workforce due to crypto winter. For those who are not familiar with crypto, crypto winter is just a term that's widely used in the crypto space whenever there's a bear market. And in the crypto space, bear markets are usually pretty significant. So that's why they're using crypto winter. And to me, that's really no surprise. If you remember, we talked about RBC and their earnings result

and their capital markets business being really crushed during the quarter. Overall, they had a good quarter, but that was definitely the division that was, I think it was down 27% or I may be off. I'm just going on memory here. But that was an indicator in my opinion that that was going to happen in the near future and this is simply just a symptom of the current bear market that we're experiencing in both stocks and crypto as markets pull back trading usually follows suit it's easy to make money trading stocks when the markets are going up but when things start going down it gets a lot tougher especially if you're not an experienced trader and here i'm thinking about people that when the markets are going up, but when things start going down, it gets a lot tougher, especially if you're not an experienced trader. And here I'm thinking about people that started trading

when the pandemic started, because they've only known number go up for a pretty extended period of time. And they were most likely just trading based on being bullish on whether it was crypto, trading based on being bullish on whether it was crypto, whether it was stock, probably also using leverage. I'm sure there's a lot of traders that were not experienced, got wiped out or lost a big part of their portfolio because they were using leverage. There's other reasons why we don't trade, but this is clearly one of them. By investing and not trading, we don't have to worry about selling when the markets are in a bear market because our end game is years, if not decades down the line. And I know there's going to be some experienced traders that will do well because there are ways to bet against the market. But I think those are few and far between. And you also have to factor in the extra cost of taxes

that will be especially high when you're trading. Yeah. And again, I think we've talked about this. I know you and I have talked about this at least privately, and it's a good time to talk about this now, which was, I don't mean to pick on Wealthsimple, but let's look at any of these brokerages, okay? Actually, let's look at Wealthsimple as an example. Okay. So Wealthsimple, as I knew it, as I recall it, was a robo-advisor, right? That's how they went to market. That was their product, was that you can go and they give you a instantly diversified set of index funds, right? That's the robo-advisor. Then they came out with Wealthsimple Trade.

When would that have been? Maybe 2018? Sounds about right. Sounds about right, right? I don't know for sure, I'll be honest. Sounds about right. Okay. So Wealthsimple Trade came in and the entire business and their advertising efforts completely pivoted to trading because they realized, wow, all this trade volume is a pretty damn good business, right? And so that's really where they went. Now that they have positioned their business so far like that, we have seen trading volumes completely fall off a cliff and sentiment fall off a cliff. That volume goes away and so does a lot of the revenue. And so it's interesting how aggressive these companies, not just Wealthsimple, many of them have positioned themselves into trading volume

because people are coming into the market thinking, doesn't even matter what they bought. They're all going to think like they're genius traders because they're in and out of stuff. And every time you look and you made a profit on all of them, because if you just keep buying and selling things that is on a straight trajectory line up and to the right, you make money. So you keep trading. Why wouldn't you? It would be stupid not to. And so when that stops working, we've seen what happens with volume and it just dries up. Yeah, yeah, exactly. And especially if you don't know how to use trading strategies that are kind of edging against a market downturn, you'll be in a lot of trouble. I mean, I would

not even get into any of those. But I'm just saying experienced traders, I'm sure there are some out there that will make a decent amount of change, but they probably have 1015 years experience, they probably saw the housing bubble and the Great Recession in 2008 2009. So they've been there before, they're probably able to weather that a bit more, but the newer ones, especially if they're using leverage, they probably don't have a lot of money left. I'll just say that. Yeah. And you know what Buffett says, the three L's to go in broke, liquor, ladies, and leverage. And if you levered up, oh boy, you can really get destroyed.

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. Calling all DIY do-it-yourself investors, Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons that are completely free.

You can search up Blossom Social in the App Store and join the community today. I'm on there. I encourage you, go on there and follow me. Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, Blossom Social in the App Store, and I'll see you there.

Okay, let's talk about earnings. Adobe, so I think we were speaking so much to talk about because we just saw each other in person. Adobe and Dollarama have 48 quarters. We decided that because you know last episode that Adobe has 48 quarters a year, and so does Dollarama because we never miss them because they always report in the most

bare bones of the earnings calendar. No other company is reporting right now and they give us something to talk about. All right, Adobe, where do we start? Okay, let's start with the bad and you're going to see why I do this. Okay, let's start with the bad. The stock is getting hammered. It's already off a really beaten up price. The drawdown across tech has been prevalent across the board, as you know. And so Adobe is no different to that. Now, the reason for that is mostly guidance. And just by the way, on revenue guidance, they set out for the quarter they just completed for Q2, they beat it slightly. So there you go. Now, they very slightly reduced full year guidance on ARR subscriptions and top line. But if you look at this, they just very recently

decided to cease all new sales in Russia and Belarus, which are not like gigantic markets for them, but they're not zeros. And if you net net it, the guidance really makes up for that. I saw something that you could actually argue they raised guidance net net of Russia and Belarus, yet that's not the headline. Of course not. It's the lowered guidance. So that's the bad. And I don't think it's that bad, which leads me to the good. They had a fantastic quarter. As they usually do, they report record revenue after record revenue on the top line, record subscription customers, record ARR. And when I say ARR, I just mean annual recurring revenue. So MRR is monthly recurring

revenue. That's how I describe my business, stratosphere.io. And someone asked me like, what's your traction? I say monthly recurring revenue, MRR. ARR is just the annual version of that. Revenues for the quarter were 4.4 billion, which was up 14% from the same time last year. And they repurchased almost 2 million shares in the quarter. Okay. So let's talk about the two business segments. There's digital media, which is most of the business and digital experience. Now, digital media is broken out into two things. And the first one being a creative subscription and the second one being document cloud. So document clouds like Adobe Acrobat, PDF Reader, and signing stuff, that kind of like document cloud file management

business. And then the digital media creative cloud segment is like Photoshop, Adobe Illustrator, Premiere Pro, InDesign, XD, like the video, photo, the creative people who subscribe to this, right? Now, this segment as a whole, which combines the document and Creative Cloud, did $13 billion in annual recurring revenue now. Sorry, that's not what they did. They did $3.2 billion. They are now on a run rate of $13 billion annual recurring revenue. Now, most of this is the creative cloud. So when I talk about like Photoshop, Illustrator, Premiere Pro, those flagship products that continue to get it done year after year, this segment's now doing over $10 billion in recurring revs, which is fantastic, right? It's unbelievable. And the digital

experience segment, that's the other segment, that did 1.1 billion in sales and grew 17%. So in aggregate, they did 2 billion in operating income for the quarter. Check out this graph. I know you can see it. This is a graph from stratosphere.io. We graph out the different segments so we can have creative cloud and document cloud here on this graph. I'd be hard pressed to look at a more straight line up than the growth of recurring revenue on the creative and document cloud segment. It's unbelievable.

I mean, that is one of the sexiest graphs you can find. Yeah, I mean, definitely. It definitely goes up. It keeps going up. It's obviously not a straight line up. It's just steady as she goes. So, it's the kind of thing you want to see because it probably will stay pretty sustainable. So, when I look at Adobe now, I mean, it was probably too expensive and deserved like most of tech with recurring revenues to get washed out a bit. I mean, they were all just trading at like kind of silly multiples, especially because some of them just are not blowing the door off growth, like growing high teens percentage shouldn't really demand 35 times sales multiples. And I'm not saying that's what Adobe was at, but you could find a huge basket of these cloud stocks

that were there. And so it is now 50% off its November 19th peak, which is quite staggering for a large cap like this. It's 170 billion in market cap now, very sticky, very prevalent. There is increased competition from these web applications, especially on creating images for the creative cloud. But the numbers keep chugging on, man. They keep getting it done from that segment. And it's obviously the most important segment of the business. Yeah.

And they're trading, I mean, pretty cheaply for this kind of business. I think I was looking, I think they're in the low 30s now in terms of PE, which is not something you would have seen for a company like Adobe in probably a long, long time. A couple of years. Yeah. Yeah, exactly. Yeah. It's not some ridiculously cheap stock, but it should come back a lot of what it was trading at. So that doesn't mean it's instantly a good value play or whatever, but there are a long

list of high quality businesses that have really, really come back down to life in terms of valuation. And maybe this is another one that needs to get added to that list of just keep an eye on this. If it keeps getting cheaper, it might just be too easy. Yeah, no, that's right. Now, speaking of valuations going down, Canadian home sales slowed down quite a bit again in May. Do you like that segue? Dude, we're on fire, man. The Canadian Real Estate Association, CREA, released its May 2022 figures. So on a month-over-month basis, home sales fell 8.6% in May.

This represents the volume, though, not the price. Housing activity was down 21% year-over-year, so compared to May of last year. It may sound like a lot, but the activity last month was in line with the 10-year average. So I think it's just a reflection that it was extremely high last year. Newly listed properties went up 4.5% in May versus April. So that's good because it increases the available supply on the market. The national average home price was $711K, which was up 3.4% compared to last year, but definitely down compared to the beginning of this year. So prices are down more than 10% compared to the peaks they reached in early 2022.

I was actually just on Twitter a bit earlier today and I saw a realtor from Vancouver who posted that he just had his first listing cancellation slash expiry in the last 2.5 years. Wow. Yeah. And he said, well, well put actually. Realtors, welcome to a bear market. to a bear market. Yeah, no, I think that that is well put. It's the first time that people are not lining up and overbidding on houses for no inspection, house they didn't even do any sort of due diligence on. And I think that we've come back to reality, which I think overall is pretty healthy. It was not in a place that made much sense just six months ago. No, no, exactly. And this might sound like good news for home buyers, but it can definitely be deceiving. Yes, it's a good thing, in my opinion, that prices are down.

I mean, I home a home, so definitely it's impacting me. The value of our home is probably down a bit. But if you're buying a home, this will probably be good. But there's a big but here. The cost of financing has also gone way up during that time period and will probably keep going up as the Bank of Canada keeps increasing rates again in July and probably several more times this year as they try to get a grasp on inflation. The stress test would be like over 7% now today, right? Yeah, exactly. I think it was, if I go on memory here, I think the stress test is either

like 5.75% or the rate you've been approved plus 2%. But now the rates are high enough that it's the rate that you've been approved plus 2%. So I think it is around the 7% that you're mentioning. I may be a little bit off about the 575. I think it's in the 5% range, the one or the other. And if you want to understand how a 1% increase in interest rate can affect the cost of your mortgage, we talked about that. I had some example a few episodes ago. So just go back a few episodes. You're ahead of the curve, man. You've been actually on fire with that recently. Yeah. Yeah. I mean, the cost of borrowing, right? Money is cheap. People will be able to bid on those homes because the payments will be manageable. But as soon as it starts going up,

it won't be good for home prices. And the ones that will probably be hurting a lot are the ones that bought a home in the last year or so, four years down the line. If rates stay at an elevated level and they really overextended themselves because they could afford the lower interest rate on the home, they'll be in for trouble. Yeah. And I feel people out there. I mean, housing is something a lot of people aspire to get to and ultimately, you know, is a need, whether it's you rent or buy and many people want to buy. It's something everyone has to do. You got to live somewhere. So, you know, I feel for the people who definitely are going to be affected by this if they're on variable rates. Like it's just a fact of life. Yeah. The four years is about more the fixed rates that'll be coming due in four years. Obviously, a lot of things can happen in four years for interest rates. Right now, we're in a rising rate environment. It could stall out. I don't know. You don't know. No one knows.

But if the banks are really serious about taming inflation, I think you can make an educated bet that rates will probably be higher even a few years down the line. And for a little teaser, we're not quite there to release the announcement. We're very close. We're very close. There's a big announcement coming from us and it's relating to what we're just talking about. You and I, I mean, you own your home. I am no real estate expert. We know our way around public markets. And so we're going to help in that case, in the real estate world. A big announcement is coming for the show. So stay tuned. We're very close. All right. So we got some news. It's not related to the stock market really, but I got some news.

I got wind of this news today that this country is banning the manufacturing and importation of single-use plastics by the end of the year. The single-use plastics, that's a word that's become quite commonly known, demonized in a way, single-use plastics. And so the government announced yesterday that in an effort to combat plastic waste, they will be banning single-use plastics. And so this includes the list of checkout bags, you know, when you're at the grocery store, those plastic bags that are just everywhere and they're just littered all over the place. Cutlery, I guess from like takeout cutlery, straws. Straws is a funny one. I'll talk about that in a second. And food service wear made from or containing plastics that are hard to recycle. So I'm assuming like styrofoam and that kind of stuff, they'll

have to move to a more recyclable and so that's going to increase costs for these qsr companies now this will come into effect in december 2022 and the items will be prohibited for sale as of 2023 so that's what they want to do now simone i don't know how you feel about this, but the straws one kills me. Dude, the straws, man. You don't like to eat cardboard? The straws one is so funny to me because as you know, I actually do care about this stuff. I do want there to be less junk on this planet. And straws, come on,

man. This was humanity's weakest effort to combat junk and climate change. Straws, man. We're so obsessed with churning out fossil fuels and treating the planet like absolute garbage. And then they're like, okay, I got an idea. No more plastic straws. Like the lowest volume, easiest to compact, tiniest little piece of plastic. I couldn't think of an idea that moves the needle less than straws. And I just laughed my ass off at this one. As for plastic bags, man, I really try not to get those. It's only if it's absolutely necessary. And I know that they've

already kind of phased those out. I don't know about the grocery stores you go to, but I know most of them have already kind of said, we're not selling these anymore. And good for them. I mean, it's just so much junk. It's just landfill. Yeah. Yeah. For me, it's mostly just if I'm like you, I really don't have a choice and I need a bag. But for the most part, we have reusable ones that we'll use when we go to the grocery store. We always don't have enough when we go to Costco, but that's a different story. You know what I'll do? Too much stuff.

Too much stuff. You know what I'll do is I'll just put it back in the cart. If it's just like, I don't really want to get these plastic bags and then i'll bring the cart to my car and i'll just put it in the trunk and then when i get home i'll grab the bags and bag it in the back of my trunk and then bring it inside that works yeah like it's not really an extra step maybe an extra 30 40 seconds and so that's a little hack you can do can i tell you about the story of my first job do you want to know what my first job was? Sure, go for it. I think I was 15 in my first job.

I swear I was like illegal. I was like 14 or something. I was working at Sobeys, okay? Up north of my cottage. And I was the bag boy, okay? So I was like this four foot nothing kid that came around and bagged your groceries. And so I would dish out literally thousands of these plastic bags. So I hate these plastic bags. It is rooted deep. I'm happy to see them go. They should go. You know, what's funny is

now I'm an expert bagger at the grocery store. Like I was trained how to do it properly, maximize efficiency, make sure the bread's never crushed. The eggs, dude, I'll never break an egg ever. Those things are going to be pristine. So that was my first job. Yeah, for me, I would say probably the first thing I started making money was an official job. But when I got,

I was 14, I got an eBay account when eBay was starting. Were you singing stuff on eBay? Yeah, I would go to kind of flea markets or garage sales and I would buy like Céline Dion long plays or I found once a first edition of the Silmarillion by J.R.R. Tolkien. Oh, yeah. I sold that on eBay. I was able to buy my first mountain bike with it. That is such a hustle move, like the eBay. Yeah, 14. So, everything was dial up and I had to scan on an old school scanner to put some images

so people would see a picture. Yeah. I love that hustle. That is good drive to have as a kid. Very entrepreneurial. 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. is questtrade.com. Calling all DIY do-it-yourself investors, Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building

and people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there.

Okay, Simon, rip off the bandaid. We got one. We've been tracking this one quite a bit too, because it also falls in this like boring part of the earnings calendar. But this one always provides some good amount of entertainment. Yeah, exactly. So, XO released their Q3 2022 earnings. For those not familiar with XO, XO is a cannabis producer headquartered in Quebec. Xanabis Group, which is owned by XO, has filed a petition with the Quebec Superior Court for protection against the Creditors Arrangement Act. Sorry, I kind of butchered that one a little bit, but this is specific. Blame it on your French speaker, blame it on that. Yeah, exactly. Easiest cop out.

This is specific to Zanabes Group and does not affect XO and its other subsidiaries. Although clearly, this is not a good sign for XO, who has been struggling financially for quite some time now. They clearly don't have the resources to back them up if they wanted to. Zanabes was not a good sign for XO has been struggling financially for quite some time now they clearly don't have the resources to back them up if they wanted to Xanabis was acquired by XO in February of 2021 for approximately 235 million dollars and we talked about that in Toronto to show how bad it's going for XO and how bad this acquisition was. So they bought them for $235 million. The current market cap of XO is $127 million.

Oof. Yeah. And that was in February of 2021 when you could make a case that the marijuana bubble was starting to burst already. It was long popped. Yeah, exactly. It was long popped, yeah. Yeah, and the CEO has, I think, made some just terrible decision. He's no longer there. But it just honestly, like the writing was on the wall already. Why in the world you would go and make this acquisition is just beyond me. But that's besides the point. more than doubled to $53 million. They had a net loss of $146 million, which was significantly more than last year. It was boosted by some write-offs. For the first nine months of the

current financial year, because this is Q3 of 2022, they lost $127 million on a free cash flow basis. So that's a 6x increase from last year. Oh my God. Yeah, it's not looking good. So EXO has reached a few agreements during the quarter relating to its financial health. They restructure existing debt that they had with Tilray. They managed to push out the maturity by three years and remove the equity clause, which would have been very dilutive for them. And for those who know the name a little bit or have been listening to the podcast, Dilution has been the name of the game for them. And for those who know the name a little bit or have been listening to the podcast, Dilution has been the name of the game for them. They've been diluting really their shares. Are they just cannabis production? Because I know many of them also have like some retail consumer facing brands as well.

I think they may have a little bit of retail, but mainly production. Just production, like large scale cannabis production? Yeah, I think mostly production. I know they have a venture. I don't know if it's still in place. They had one with Molson. Okay. Yeah. But only, yeah, 53 million revs, which has doubled. So it's not like the scale is that significant yet. No, exactly. And despite this and measures to reduce production and cost, XO is still in a very difficult position. The going concern section

in the quarterly earnings was pretty bleak. There is some significant doubt that they can continue to operate for the foreseeable future because of debt obligation and continued free cash flow burn. For those not aware, whenever you see some doubts from the auditors or the company about going concerns, it just means that there is doubt that they'll be able to continue their operations if things continue at the same pace they are right now. So it's really important. It's something that should be a big red flag. If you see some wording like that, that does cast some doubt on the operations going forward, that's usually a sign, at least for me, to stay away from that business just right there, if you see that. And the last time I talked about XO, I mentioned

they had received a warning from NASDAQ about potentially being delisted because they're not meeting the $1 requirement to be listed because XO is listed on the TSX, but also on the NASDAQ. I did not see any updates recently regarding that, but it does not look good. The stock is currently trading at around 20 cents per share on the NASDAQ, and they already did a reverse split. I think it was last year, if I remember correctly. Yeah, these companies are crazy to me. So I'm just looking here, These companies are crazy to me. So I'm just looking here just for my quick search. It says that in 2021, they had almost 1300 employees on a 50 million revenue base. That is kind of crazy. So many employees for the size of what they're actually doing. Shares are 20 cents on the NASDAQ. Dude, if you bought, I shouldn't laugh. This is not good. But if you

bought shares in April of 2019, you've lost 99.4% of your investment. Yeah. And honestly, if you had a CEO or management that had like, I'm sorry, but half a brain, like that acquisition they did in February of 2021. We were talking on this podcast how the Canada space was really not developing as a lot of people have predicted. Yeah, they still went out and made that acquisition and they were already struggling. Yeah, it's not like it was the height of the mania 2018 vibes. like it was the the height of the mania 2018 vibes yeah yeah honestly i anyways i'm beyond word as to why they would have actually made that acquisition but i think we've talked a lot enough about weed and marijuana i think you have a name that you sold what last year yeah yeah let's move on to eng house ticker n e n g h on the Oh boy. Okay. I'll make this quick. This was a mistake of mine.

Well, I mean, I guess not really in terms of financially because I sold it at the $60 mark and actually made money on it and collect the dividend and today shares trade for less than 30. So I dodged a bullet. However, it was certainly a mistake of mine because I do not like to sell stocks. I like to hold them for a very long time. And this was one that I absolutely sold and feel pretty good about that decision for the reasons I'm going to mention, as well as we have an upcoming episode about reasons to sell. This is a perfect example as it fits in one of those categories. So they had a list of great acquisitions that it seemed like they had a crystal ball. I was very impressed, but this is why you monitor the business. This is a big

commercial for why you continue to verify the thesis, not the verifying the price of the stock, but verifying the business and your investment thesis. So they had explosive growth in 2020 from their companies. Organic growth was through the charts. They had acquisitions in call centers, communications, video communication platforms in 2019. And if you look at that, you're like, that is quite timely, right? And so then 2020 hit and those acquisitions were growing super fast organically. And I was like, Simone, take a look at this. This small acquirer is growing like 60% quarter over quarter because of these video communications platforms. Now, obviously that pulled forward a lot of growth. And now you're seeing the worst, Is that five, one, two, three, four, five,

the worst five letter word in software. I had to verify that was five letters. Churn. Okay. Churn is the worst word in software. Investors hate it. Operators hate it. And they should in business to business because business to business software is supposed to be really sticky. When you have people canceling and moving to competitors, that means that it's really not that sticky, right? It's proving that it's not that sticky. Now, off that 60% revenue growth that you saw, I think that's the number it was, their top line has been declining quarter over quarter steadily since that point. And obviously, that is due to churn. Not good.

Now, the management team is everything. And that's why I decided to deploy Capital into Constellation Software instead of Enchaus because I believe that they are a superior management team at deploying money into vertical market software companies, especially here for a TSX option in Canada. Now, the pace of acquisitions has been subpar. The management team has been unimpressive, uninspiring on the calls. It's a bit ridiculous. Steve Sadler, I don't know, man, you're not really impressing me anymore. Revenues, operating income, net income, all down. They said more competition, tough environment in Europe. Now, the bright spot is they have 230 million in cash and no debt on the balance sheet. That's the bright spot. It says that their goal

here is to continue to generate cash and increase the dividend. That is their goal. It does not read anywhere that I want to see from a software roll-up of increase the pace of acquisitions over time, drive incremental ROICs. So the management team main intention is returning cash back to shareholders. I am glad I moved on and deployed into Constellation instead. Very different objectives, very different management team. And yeah, that was a good move overall. Yeah. Yeah. I mean, it sounds like it. I know you talked about the name quite a bit when you owned it. I never really was attracted that much to the business, but definitely churn is not something you want to hear. But I guess the good news is they do have a net cash position. So at least they have some time to hopefully turn things around, but that does not seem to be their priority. It's not the priority. That's why it's concerning.

Yeah, and now moving on to our last quick segment here, just to show how the TSX continues to outperform the S&P 500 and NASDAQ. We've talked about this probably a couple months ago, and I thought it was just a fun little idea to look back at it. It probably comes to no surprise to anyone who's been listening to the show or keeping an eye on the markets, but the TSX is only down 11%, while the S&P 500 is down 24% and the NASDAQ 33% year to date. I know the markets are up a little

bit today. This was taken over the weekend, but that's pretty close. I'll go on a limb and say the TSX is still outperforming its two counterparts here. And we're clearly in bear market territory in the US and correction territory for the TSX. But for the TSX, it's pretty simple why it's been doing well. Canadian banks are down a bit, but nowhere near the broader markets. And the energy sector has been one of the best performance sectors year to date, if not the best. Those two sectors are heavily weighted in the TSX. And we talked about that in our recent ESG episode. But obviously, it's not been a great start to the year. So even if you own some bond ETFs, those are also down 10%.

Pretty much everything is down at some level this year, regardless if it's fixed income, like the traditional 60-40 portfolio. So 60% equity, 40% bonds is also down. So whatever you're doing, you're definitely looking at some negative returns, at least so far this year, unless you're fully in energy. But it's a good reminder, I think that, you know, it might feel like an eternity right now. But if you focus on the long term and keep dollar cost averaging, good things should happen, obviously, by selecting either good businesses or betting on some broad-based index funds. Yeah. And there's lots of good readings on this on how to deal with bear markets. I think The Psychology of Money by Morgan Housel is a good book. Something like that to revisit

in a time like this, that rational, continual reminder that this is what you should come to expect, it's part of the game. It is going to come. Bear markets happen. They're a regular part of investing. And maybe it's time to revisit some of those books. Yeah, a good one to just add to that, Mastering the Market Cycle by Howard Marks is also a good one to just understand a little mastering the market cycle by howard marks is also a good one to just understand a little more how those market cycles work i've read so many howard marks letters but i actually haven't read that book it's good yeah yeah it's good i like it audio or traditional reading does he read it because i know he does lots of media stuff i don't think so i'm trying

to remember it's been a while since i listened to it but i don't think so. I'm trying to remember. It's been a while since I listened to it, but I don't think so. I think he talks a little bit about it, but I could be wrong. But anyways, yeah. Maybe he came out and did the audio book because I know he's been going on podcasts and stuff. Like you'll find him on lots of media stuff and there's lots to learn from Howard Marks. And I remember there was one podcast that he did. I don't know what it's called. So, maybe just look it up. But he just does like an entire like hour about how to continually test your mental models and thinking you know the answer to something without cautiously challenging your own investment thesis. It's just like a super dangerous place to be like thinking you know everything.

And it's just really like humbling to listen to that guy. Yeah. And fun fact, everyone knows we like Brookfield. So they actually bought Oak Tree Capital, which is the – well, they got a control stake into it and Marx and some other members of Oak Tree still own like a minority stake in it. But that happened in 2019. So just Brookfield doing some Brookfield

things there again. Was it only 2019? In my mind, they've owned Oak Tree for like so much longer than that, but I guess not. Yeah, very cool. All right, guys. Thanks so much for listening. It's first day of summer. So, hope you guys are enjoying the summer. Get out there. It's a good time to fire up the grill, dust off the golf clubs. What else can we do? Hit the summer. Get out there. It's a good time to fire up the grill. Dust off the golf clubs. What else can we do? Hit the beach. What else do we got, Simone? Well, mountain biking.

You're a biker. Yeah. Yeah. Your dad would be happy about that. Your dad and your brother. Yeah. Yeah. Yeah.

My dad and my brother. Yeah. He met my pops. Big podcast fan. Huge podcast fan. Yeah. It was awesome talking to him. Yeah.

Love that. All right, guys. Thanks so much for listening. To support the show, join tci.com. That is join tci.com. Our website is thecanadianinvestorpodcast.com. Our Twitter is at cdn underscore investing. And I would really appreciate if you checked out, if you have not already.

I met a bunch of you last weekend. I was like, have you checked out Stratosphere? It's like, oh, I've been meaning to, I've been meaning to get to it. Dude, go to stratosphere.io. We have a new domain name, so it's even easier for you. Stratosphere.io. It's like Yahoo Finance on steroids. It's like a professional institutional terminal without the price tag. That is stratosphere.io. Go there and use code TCI for 15% off because the dirt and ramen pile is almost depleting. I need more dirt and ramen to continue on, it's getting tough. Yeah, and it's getting more expensive with inflation. to continue on, Simon. It's getting tough. Yeah, and it's getting more expensive with inflation.

The dirt is still the same price. The raw almonds are creeped up a little bit, but the dirt, no, that's just straight from the backyard. That doesn't cost anything. Thanks so much for listening. We'll see you in a few days. If you're new here, we release episodes on Mondays and Thursdays and some exciting news coming up for all of you guys. Take care. Bye-bye.