The Canadian Investor - Episode 12 - Let's talk about market caps!

Episode Date: February 17, 2020

This week on The Canadian Investor Simon and Braden talk about the different categories of market caps and if you should trim a winning position when it is becoming a big portion of your portfolio. We finish the episode with our Tip of the D’eh! Tickers of stocks mentioned : FRII.TO, PFB.TO, TFI.TO, EQB.TO, ENB.TO, TD.TO, RY.TO, GOOG, APPL, BEP-UN.TO, GOOS.TO, TERP, CNR.TO, BNS.TO, OTEX.TO, WSP.TO, CSU.TO, AMZN--- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee omnystudio.com/listener for privacy information.

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I'm Brayden Dennis. I'm joined by Simon Belanger. And today we are going to talk about market capitalization. Simon, what's going on, man? I'm good. I'm pretty excited to talk about that subject. And we have plenty of content for this episode. So it should be fun and should give people a better idea of what wrap their heads around market caps. Yeah, man, I am juiced up on coffee right now, so this should be a good one. This is a very elementary, you know, beginner type of topic. However, it is important when people talk about companies, they usually open with like

the market caps. You can get an idea of the size of company we're talking about right out of the gate. And the whole idea of investing is it's not the intrinsic value, but it is what the value of what the market is pricing the company at. So depending on where the market is pricing it, if that's close to its intrinsic value, I mean, that's kind of us to determine as investors. But I am going to kick it off, or no, Simon,

you're going to kick it off with nano caps and micro caps. We're kind of bucketing this together, but what is the definition here? Yeah, exactly. So it's not super easy when you try to find companies that are under $50 million in market caps. So we just decided to group in nano caps and micro caps. So if you look on various sites, most sites will say nano caps are under 50 million market cap, and then micro caps are from 50 to 300. So we have two examples for you guys. We couldn't really think about a nano cap, so just two very small micro caps. The first one is Freshie. So Freshie, the healthy fast food

option that's been not doing quite well since its IPO. So currently they have Freshie with, I'm looking at Yahoo Finance, a $72 million of market cap. The other one is that I... They probably IPO'd at like $300 million, which is the funny thing. Yeah, exactly. I think so, because they're down like 80%. It hasn't been a good story. Yeah. So yeah, there's Freshie. And then there's the other one, I had an example, is PFB.TO. So PFB is an insulation company. So they're tied to the housing market. And generally, micro-cap, there is an advantage for people like us that invest a small investor because these companies are usually

too small for institutional investor to really invest into or at least invest large amounts of money. So they're usually low volume, low trading volume, and you can find some really interesting companies and sometimes companies that are overlooked by the market because there's not a lot of press regarding them. PFB.TO is a good example. So back in November, it's a company I initiated small position in because they announced a special dividend of a dollar a share. And back then it was trading around 950 a share. And it actually took like two, three weeks for the market to kind of adjust and realize that they were doing a special dividend

of a dollar per share, which represent about 10% of the value of the company, which was kind of crazy. So it gives you that extra margin of safety. So that's an example where the market, I find, will be a bit slower to react. One of the downsides for microcap is you'll have to do a lot more due diligence when you invest in those companies just because there's less information available. So you'll have to dig in through the financial a lot more. You'll have to listen to a conference call for the earnings calls. So it is, if you're ready to do a bit more homework, you can actually find some good value in there. One cautionary tale is keep in mind, you might see some low P ratios,

for example, or low multiple ratios for micro caps. You have to realize that because they're lower trading volume, they're not as well known. They usually won't trade as high as multiple as some well-known companies i totally agreed those are good points and it is good to preface this by saying market cap in terms of labeling it a nano cap small cap micro cap large cap is really arbitrary arbitrary but it is typically used as a label when talking about stocks. So just to give that as a generalization, a lot of people think larger cap stocks are safer because they're more established players generally. So I mean, there is some merit to that, but it is definitely a generalization. So Let's talk about small caps.

This is between $300 million and $2 billion in market cap. When you get into that area of $1 billion in market cap, these are small companies when compared to the rest of the market. However, they're not small companies in the grand scheme of things. Just in public markets, they're small. I do not buy into that these are risky companies because they're only around a billion in market cap. I find that there's a lot of value in this space

in terms of good prices and good companies. I've definitely turned a lot of companies in this $1 billion area that are now trading at like $6 to $10 billion. And that's really where you're getting some nice returns. So small cap, an example of that would be TFI. Or no, wait, which one are we on? I think Equitable Group you had mentioned.

Yeah, yeah. So Equitable Group is another example of a bank that is around a billion in market cap. Oh, no, 1.8 billion in market cap. So they're under that 2 billion threshold. I bought the stock at around 1 billion in market cap or less. So that gives you an idea. And Simon, are you going to talk about mid-caps? Yeah. and uh simon are you gonna talk about mid caps yeah so mid caps uh when we're looking at it uh

so it would be in terms of market cap the mid cap would be 2 billion to 10 billion uh usually and again those are like those are fairly you'll see that uh you might see different amounts being thrown around like obviously these are a bit more subjective um so these are just you know arbitrary numbers that we're going with right now we kind of agree that like it it gives a good example of what they are in terms of mid-cap uh to wrap your head around it um i think canada goose would fall into that if i remember correctly um we're a bit thrown off here because we actually merged the micro and the nano caps together. So that's why I think we- The entire order got thrown off. Yeah, exactly. I think I was supposed to take this one. I was going to say TFI as an example.

Yeah, so there's TFI. Canada Goose is also an example. So Canada Goose, 4.6 billion. TFI, I think is close to 4 billion in market caps. So those would be mid-caps right there. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself,

I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your

home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Exactly. So now that our entire order is thrown off, all good. I can talk about large caps in the sense of Canadian stocks. You're going to find the big banks here, Enbridge. The top of the TSX index all sits in here. here however we were talking about this before offline i think of enbridge td royal bank make of nova scotia cn rail brookfield those would be the biggest six on the tsx i think of them as like the canadian mega caps even though technically in the grand scheme of things by definition mega caps are even though technically in the grand scheme of things, by definition,

mega caps are over 200 billion in market cap. However, we don't have any that are over 200 billion in market cap. You know, Apple, Microsoft, Walmart, American companies, these are the ones that are over 200 billion. Facebook, Google, I'm just off the top of my head so we in canada you know the big banks typically you know royal bank and td have had the biggest market cap for a long time on the tsx so i think of them as canadian mega caps but you know by definition these are large cap stocks anything exceeding 10 billion but that is a very large window uh constellation software open text wsp these are all like just over 10 billion and they're still grouped into that bucket so very very arbitrary it is worth noting you know when people talk about market cap and they don't buy mega cap stocks because they think, okay, well, if Amazon's already trading or Apple's already trading at a trillion in market cap, it's harder for them to double to 2 trillion than a company that's at 1 billion to turn into 2 billion. And that I agree with.

That's the law of large numbers. I mean, you're more likely to find companies that are going to turn into the Peter Lynch 10 baggers. If you're looking at smaller market cap, that's just going to happen. So I do buy into that example. What's your thought on that, Simon? Personally, in terms of market caps, yeah, you might be able to find multi baggers. So 10x, 15, 20x. Of course, it'll be much harder to get that through large cap or mega caps.

But the advantage of those larger companies, oftentimes if they have a proven track record, they also have a strong moat. So there's a lot of advantages. They're also covered more, so it's easier to find information on them. Yeah, I think there's advantages to everything compared to when you look at different types of market caps. I think if you have a good company, they have a strong track record, and they're still, you know, when they provide guidance, they usually meet it or exceed it. I don't think it's an issue personally if you're looking into large cap or even mega caps. Totally. So I'm a beginner investor for this example. Let's just take me. I just started investing and I look at TD and Royal Bank and

I noticed that their share prices are not the same, one being more than the other. I think Royal Bank being the higher share price, also higher in market cap. Does that mean that the company is more expensive because the share price is higher? And I know the answer to this. I'm just playing the role here.

Does that mean that the company is more expensive because it has a high share price? Or contrary, does it mean price to earnings, price to cash flow, there's even price to book. So these are all things that will be indicator on whether a company is cheap or not. There's also the peg, so price to earning growth. So I know Peter Lynch talked a lot about that, usually if it's below one. So you factor in the price to earning compared to the expected growth of the company. So if the number is below one, so you factor in the price to earning compared to the expected growth of the company. So if the number is below one, then it's usually a good bargain in terms of what you can expect. So yeah, you definitely shouldn't look just at the price of one unit of the company or even at just the market cap. You have to put things into perspective and really get a better sense of what the multiples

are for the company. So if you're comparing TD to Royal Bank, then you can check, okay, what are the earnings? What's the price to earnings? How do they compare to each other? How do they compare to Equitable Bank? How do they compare to Bank of Nova Scotia, CIBC and all that? And then you'll be able to make a better analysis and determine whether, in your view, if it's a cheap stock or not, or a cheap company or not.

Yeah, exactly. Because of the nature of the calculation of what market cap is made up of, the number of shares outstanding multiplied by the share price gives you the market cap. I look at market cap as more descriptive in terms of just talking about quickly what we're dealing with. Oh, this is a $1 billion in market cap company. This is a $80 billion in market cap company. This is a $500 billion in market cap company. It gives you an idea of the kind of beast that you're working with. If it's a smaller, medium-sized, or very large company, it's more descriptive than anything to figure out what we're dealing with in the first place. So that's the way

I look at market cap personally. And yeah, I mean, this is really elementary in terms of the topic, but it is important because a lot of people, when they first start investing, they look at the share price and think that that has any correlation with what the company is worth or what its market cap is. You're missing the important part of the calculation of outstanding shares to determine what the market cap is. outstanding shares to determine what the market cap is. Yeah, I totally agree. So do we want to switch over to what we were texting about and my dilemma?

Oh, yes. So what was it, Brookfield Renewable Partners? Yeah, Brookfield Renewable Partners and Terraform Power. Yeah, exactly. So Simon, that is just sending me a text being like, okay, Brookfield and Terraform are becoming huge parts of my portfolio. I think I want to trim them. They're massive.

And I said to him, no, don't do it. Don't trim. And the reason for that is when you manage your own portfolio, you are not subject to, you know, you're not managing a client's portfolio where you have to trim positions if they get too big, all this kind of thing. I say add to the other positions if you think it's becoming too big, you're taking on too much risk. But don't sell winners, man. Do not sell winners.

Water the plants and trim the weeds. If you want to add to other smaller positions or ones that have not done that well but you still really believe in keep contributing to those ones but man brookfield renewable energy partners and terraform their cash flow generating machines are firing on all cylinders they're owned by brookfield for the most part, with Terraform. So just hold on to them, man. Hold on. That was me iterating it over text. So I don't know if you could feel that when I was texting you back, Simon. Yeah, I definitely felt that.

So just to give people a bit of an idea, so I built a position to both companies over the past two years. I'm up close to 100% when I'm factoring in the dividends for both companies. So Terraform Power actually bought in when Brookfield announced that they were getting a majority stake into it about a year and a half ago. At the time, it was trading around like $9 a share. And my average cost is about $11 a share. And now it's close to $20 a share. And Brookfield has done amazingly well, the renewable partners. So it's a good problem to have.

The total of my portfolio for those two is like approaching 20% right now. So they're definitely very solid companies. It's just for me, I'm a percentage guy. So I was thinking about like diversification. And the reason for Terraform that kind of prompted that is recently Brookfield said it would purchase the rest of the outstanding, well, the rest of the outstanding short for Terraform power on a three to one basis. So it's, it concentrates a little more although

brookfield did don't want a majority stake um so my reasoning was more yeah like it's uh it's getting a big part of my portfolio but on the other end like braden said it's been doing really well has good management they're generating cash flow they want to increase the dividend from five to eight percent per year um They have a solid track record. It's not like I'm talking about the growth company that's losing money that's just been on a heater. Tesla. We actually did not prepare that. That was funny.

I'm going to hold on to my stake definitely and not trim it for the foreseeable future. I would tell people the one exception I might make to that is if you're really finding that you can't sleep at night because you're too worried that you're too concentrated, then for your own well-being, it might be good to trim that position just because, yeah, you shouldn't be missing out on sleep because you're too stressed out. If that's the case, then you probably should just trim it a little bit. 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, 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 questtrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products.

I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. I'm glad you came around, man.

That is good to hear. And when you talk about 20%, let's put that in perspective. So if you own a Canadian index fund, like a TSX-60 or even like an all cap fund, since it's market cap weighted on that ETF, TD and Royal bank make up 17% of your investment portfolio. If you own that very air quotes right now, diversified index fund. So I would not freak out about 20%. Bill Gates' portfolio is just like six companies, and he's pretty smart. And Warren Buffett has been quoted saying diversification is for people who don't know what they're doing. Or it might be a Charlie Munger quote, not sure. Either way, you get the point.

If you're confident in those companies, and to that point as well, actually, I'm going to talk about this. confident in those companies. And to that point as well, actually, I'm going to talk about this. I have some really smart friends that text me all the time being like, oh, I'm going to sell this position because it's at a 52 week high. You know, it's done so well. What are you doing? No, do not sell at 52 week highs because that's some, you know, peak and that it must fall. Highs mean higher highs generally because the company is doing well. It's executing on all cylinders. That is a horrible thesis to sell a stock because it's doing well. So that's my take.

I'm very passionate on the subject. Yeah, no, and I'm definitely, like I said, I'm not going to sell anytime soon. It's a good problem to have off, of course. I'm not complaining here. So now we're going to go to our tip of the day and I'll let Braden give our tip of the day. All right, Simon. Yes, the tip of the day. Also something I'm very passionate about.

And it actually is kind of all related. When you go and check your investment account every single day, every single second, stop doing that. Like seriously, stop doing that. You do not need to be constantly checking your investment portfolio. I'll tell you a little story. Two summers ago, I didn't look at my portfolio once for four months because I was traveling

and I had no worry in the world. I came back to everything doing well. This comes down to knowing what you own in your portfolio and being confident that you're buying high quality companies that even in four months, in terms of the grand scheme of things in your portfolio and these companies' life cycle is so small, such a small timeframe. So you do not need to be looking at your portfolio every single day. And if you do look at your portfolio every single day, which is fine, and you see that things are moving up as much as 5% a day on certain positions,

do not freak out. Remember to remain the course. I think people probably think I'm a psychopath because if I saw everything down 10 like the market was just crashing you could ct scan my brain and you would not see any sort of like activity at all because i'm very level-headed to this thing you know markets move up and down know what you own stay the course and stay invested that's that's what you got to do yeah totally agree um i i wouldn't check my stocks uh too often especially if you're

prone to get really worked up if you see some big fluctuations i'm probably not the best example because i will check it a few times a day but I'm probably the opposite of Braden that way is I if I see a 10% drop I actually have company I like I'll get excited because I if I really like the company and the reason for the drop is not really warranted then I find that it might be a good buying opportunity so as long as you have the right mindset you know it's fine to check the stocks but if you don't and if you know that you might take a rash decision if you check it too often then you know check it once a quarter check it once a year take inventory of your stocks and what they're doing if they're still on course your premise is still true but yeah checking

the daily or even hourly or even every 10 minutes, which is super easy with our phones, can make you make bad decisions. Yeah. Also, your brokerage account might send you, like you might have it set to tell you every time there's like more than a 2% gain. That's not good for your mindset when you're investing if you're constantly getting those alerts i do not use stop losses so i mean this is kind of all related i don't want to derail it too much the only alerts that i do have with my brokerage is if they exceed certain volume movements and what that'll tell you is that in large institutions are buying or selling or insiders are buying and selling large, large trunks. That's very interesting to me because I want to know that. But if stock moves up 2%, 3%, that is completely normal.

Do not worry about it. Do you have any alerts set, Simon? Not really, I'll be honest. I think I still have it on default with the quest rates i think it's 10 percent 10 percent there's a a high volume yeah it goes it alerts you um i won't i personally don't pay much attention to them i'll uh every so often usually uh once or twice a month i'll go and you know look at the twice a month, I'll go and, you know, look at the companies a bit more thoroughly.

But usually I'll do it twice a year. I'll take inventory of my companies. I'll look at their most recent earnings, usually the annual conference call, just see what's going on. But yeah, I don't pay too much attention to alerts. Generally, I will check, like I said, on my phone on a daily basis, but, uh, if stuff goes down or up, I usually kind of stay level headed. And like I said, if it goes down, I see it as a potential buying opportunity.

That's because you are a smart man, Simon, and you're a value investor. So that makes a lot of sense. All right, guys, that does it for this episode. We will see you next week. Thank you so much for all the reviews. Everyone has been leaving. I just want to pump our own tires here. The Canadian Investor is sixth in Canadian business.

We're up there with Motley Fool and some really, really big names. That is crazy to me, guys, and I appreciate all of you guys listening. Thank you so much, and we will see you next week. 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. Thanks for listening to this episode of The Canadian Investor. To get a list of the top Canadian dividend stocks for making investment decisions.