The Canadian Investor - Episode 14 - Two Wonderful Businesses and More Market Volatility

Episode Date: March 2, 2020

This week on The Canadian Investor Simon and Braden talk about payment processing companies and discuss the recent market volatility. We finish the episode with our Tip of the D’eh!Tickers of stocks mentioned : V, MA, PYPL, SQ, TCEHY, BABA, MELI, STNE, CSU.TO, DSG.TO, ENGH.TO, OTEX.TO, CNR.TO, LULU, AMZN, GOOG, FBhttps://www.stratosphereinvesting.com/blog-2/4-top-tsx-software-companies-producing-free-cash-flow-right-now--- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee 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. What is going on everyone? We have another week of The Canadian Investor. I'm super, super pumped for this episode for two main reasons.

One, because the S&P and the TSX and DICEs are both on a downward trend, more than we've seen before in the past couple of years, which most people get a little worried about. But I have such a long-term mindset that this is an awesome time to be able to pick up high-quality businesses at a discount. Just like Warren Buffett, I buy stocks like I buy socks on sale. And two, because we're going to talk about two companies in particular in the payment space that has some of the deepest competitive advantage I can literally think of in the entire world, which is Visa and MasterCard. Simon, what's going on, man? Hey, I'm good. Yeah, it's been an interesting couple of days for those of us who like to invest. Definitely since we last recorded last Saturday, so we're on Tuesday recording this on the 25th.

So we've had a couple of days of the markets going down. So it's definitely been something pretty interesting to follow. And I'm getting, just like you, I'm getting pretty excited on getting into some companies I've had on my watch list that were quite overvalued and really interested in talking about that payment space, especially since we have some listener questions on that. Yeah, absolutely. And although these companies we're talking about

are American mostly, that's okay. I mean, I would not say that's a huge risk currency wise. The US dollar is, I'd say the most strong. I wouldn't say it's not an opinion. It is definitely the strongest currency in the entire world. So I would say that's not a huge risk to be worrying about if you're buying high quality companies for the long run. So I'll kick it off by talking about Visa and MasterCard. I'm not even going to talk about them in particular or like individually. And the reason for that is because if I was to own this space, I would own both of them equally weighted and just hold them for a long, long time. And the reason for that is they have the best duopoly I can think of in the entire world.

It is a global player. They're both 450 billion in market cap and over 300 billion in market cap, respectively, between Visa and MasterCard. Numbers are very similar. Low 10s on revenue growth and high 20s on earnings per share growth over the last 10 years. This has been an incredible cash flow generator and an incredible compounder.

And there's one really big misconception about these companies in particular, is that they are financial companies. And that is a huge misconception because neither Visa or MasterCard actually lend any money. And you might be thinking, well, how is that possible of their credit card companies? Well, here in Canada, the big banks generally issue Visas and MasterCards and they are taking on that liability and loaning the money. Whereas Visa and MasterCard are just providing the solution between merchants and payers to be able to buy various goods online and in person. So they're collecting fees during the transaction, but they're not lending the money. So let's clear that misconception right away. And the reason that I think that is so attractive

is because it has a network effect where no competitors can enter the space because how are you going to possibly make ground on this space when no one uses it? So I say, hey, Simon, I have this new card that's really, really exciting. It can do this. it can do that. There's 10% cash back.

Great, great, that's okay. But no one uses it, so that means no one accepts it. So you have that chicken and egg situation where you really can't break the rails that Visa and MasterCard both have globally, and I just think it's an incredible business. Yeah, I definitely agree. It's not hard to understand how good of a business they have. Visa and MasterCard, they're kind of the two players. There's also Amex that you can think of, but again, American Express, generally they have to do all these perks to get people to get

in because not all the merchants do accept them you may have heard discover as well uh i kind of challenge you to find places that take discover yeah good luck yeah that's a that's kind of the the way i see it too but yeah they've been increasing sales on a regular basis i think they're both increasing around like 10, at least double digits every year, just pumping free cash flow. The main thing on my end that was preventing me from investing in them is I found the multiples a bit high. But again, I think they're high for a reason. So there are companies that I have on my radar. And if this market correction continues, I'll definitely start a position in both of them.

Yeah, very good points. The valuations are quite rich at 36 times earnings today for Visa and a little over 40 for MasterCard. And I think that these companies will demand those high valuations for a long time. I'm a huge value investor, but at the same time, if a company demands a premium for the qualitative and quantitative things that they bring to the table, both Visa and MasterCard fit the bill. So MasterCard's growing a little bit faster in

recent years. They had 21% revenue growth in 2017, 11.5% last year, and Visa just a little underneath those numbers. MasterCard has done a little better in emerging markets, so that's kind of the bullish case on emerging markets. I did a trip in September to South America, and I couldn't believe at how much ground these two companies have made in the last couple of years. It was like a badge of honor if a company now accepts MasterCard and Visa. They literally have signs in the window claiming that they take it. And this is a huge win for basically everyone involved. These companies provide a lot of value propositions. And there's always these disruptors in fintech.

However, they're not challenging Visa and MasterCard. They are working on top of the Visa and MasterCard networks because good luck penetrating their competitive advantage. If you are Stripe or you are Square or you are PayPal, you are accepting Visa and MasterCard payments. So there's a lot of very interesting things happening in the space. Apple Pay, to name one right off the bat. Apple Pay is doing very well,

but they're not challenging Visa and MasterCard. Apple Pay is doing very well, but they're not challenging Visa and MasterCard. They're actually boosting growth organically for Visa and MasterCard without even having to do any of the R&D and capital investment. So I find that really interesting. Yeah, and it's hard to argue with that. And you can also make a case that there's a huge tailwind still for these companies so we're still just transitioning to uh more like cashless society so that's a big tailwind you also have all the emerging markets whether you're looking at latin america india

i think china is a bit of a different case mainly because um there's uh tencent and also alibaba that have their own payment system um I'm not saying that MasterCard and Visa can't get into those markets. They probably will to some extent. But I know with WeChat, Tencent has quite a good hold on there and same thing for Alibaba. So there's a big tailwind for these type of companies. In terms of PayPal and and square so i think there's definitely some interesting plays in those as well so paypal i think more and more sites are accepting paypal it's a very similar business model where they take a little piece of each transaction same thing goes for visa and mastercard they get a small portion of the transaction. And for most people, they might think that,

or a lot of people falsely think that Visa and MasterCard actually are the ones offering credit. Those are actually the banks that offer credit. Visa and MasterCard, it's a processing system. So they get a small percentage of the transaction. So PayPal is a slightly different business model. um so paypal is a slightly different business model uh same thing for square uh but they do offer a bit of a play on those payment systems in terms of my philosophy i'm going to steal one from another someone else i heard on a podcast so i know we have some people saying they listen to motley fool podcast and j Jason Moser one of their analysts over there has a war on cash basket so he has equal weights of Visa MasterCard Square and PayPal so for those looking for a bit more exposure to this whole ecosystem also obviously PayPal and

Square will be a bit more growth companies that's a good approach to take and I mean when I hear you're a good idea I'm more than happy to steal it. Obviously, I'll give credit to whoever. But yeah, that space to me is just going to continue growing for years and years. I'm going to put you on the spot, Brayden. I know you've mentioned the past. I'm ready, man. I'm ready for it. Exactly. So what's your take? I know a lot of people, I've got a few friends that are into cryptocurrency. Do you think that's a potential future technology that could disrupt Visa, MasterCard, PayPal, or Square? Yeah, that's a good question and something I thought about during the crypto mania where it was getting a lot of hype. And the thing that I thought was really funny

about cryptocurrency investing in general is although I believe the technology does provide a lot of merit, like it is cool, everyone's investing into it to make money in fiat currency, whether it's Canadian dollars or US dollars, depending on where you're investing or wherever you live. So that was the main intention was to make money in fiat currency. And what does that really mean? Well, then you're going to take that money and then buy stuff on Visa and MasterCard. So I don't really buy into that Bitcoin and Ethereum or whatever one emerges as

the most popular one is going to be taking over fiat currency in any near, near future. I get the technology has merit and has a lot of benefits to other sectors, not even just currencies. benefits to other sectors, not even just currencies. So it is a good question. I do not see it as a risk. And I see Visa and MasterCard being the ones to really use that kind of technology for secure payments worldwide. So I just see what, based on what's happened in FinTech over the last 10 years, is those who have tried to disrupt the actual merchant and consumer interaction that Visa and MasterCard dominate have just completely got crushed. No one is coming out of the startup world with,

hey, I have some new awesome challenge to Visa and MasterCard. It is how can we use their system and their network that's been created across the entire world. And I think that's really, really powerful. Just like a railroad has such a strong moat with their rail lines, I think of it in the same way with their network that is used all around the world. if i'm going on a trip anywhere i know i'm going to be able to tap or swipe that visa or mastercard and not have any concern so man that is a great question but i wouldn't uh wouldn't say it's a bearish case on that yeah and i totally agree and for those interested in getting into MasterCard or Visa or even PayPal and Square,

so with the whole coronavirus, I know MasterCard, I think yesterday, issued a revised bit. Their guidance said it would be a slightly lower and just by a couple percentage points. So if you're really like us and you're looking at the long term and you want to hold these companies for the long term, it could really be an opportunity to start a position in the next few weeks, depending on how the market reacts. Yeah, that's a good point. As we eye these stocks, they're down today 5% and 6% each at least. each at least. So I mean, just on what happened today, I can tell you right now, these companies are not worth less than that kind of drop, right? So the market over a short term is not efficient. It is very efficient over the long term. And I'm seeing these numbers of consistent double-digit compound growth on both the top bottom lines and free cash flow.

The business is very capital light. They can invest and easily get more revenue and earnings from it. So I just think in 10 years from now, they're still going to be maintaining this growth because so much of the world is still going to catch up to the war on cash. South America, I told you, is one that's booming for these companies right now. India, only 5% of merchants take card right now. I would say their biggest competition is the WePay and Alipay coming from China. They could potentially take some of that market share in India. It should be interesting to see how that shakes out. And then Africa as well. I mean, there's still so much of

the market where commerce is happening. And I see us becoming a cashless society. It's already happened here. It's going to happen there as well. So I'm really excited, man. I can't see them not achieving double digit growth on all three metrics I just mentioned for a long time to come. 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, 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. Yeah, totally. And all these companies, if you guys have a look at their financial statements, especially if you look at the cash flow statements, you'll notice they're

pumping quite a bit of free cash flow. Visa, MasterCard, PayPal, Square is starting to become free cash flow as well. So they're really, really interesting sector. If people are looking for other plays in Latin America, there's Mercado Libre with Mercado Pago. They are losing money. So keep that in mind. Stone Co. is also a company that Berkshire Attaway has a position in. I'm not sure if it's Warren Buffett or one of his lieutenants that invested in that. It's a bit more of a growth story. We won't really talk about those, but those are companies that you could look into if you're interested in this space.

So I think, did you have anything else to add, Braden, on the payment processors? No, I think I've already pumped Visa and MasterCard through the moon on high praise. Just wanted to mention that they also are achieving like 30% return on invest capital. So that number is really, really nice. The metrics are so, so good. And at a premium for earnings, like from a PE perspective, I think it looks expensive on the surface. But when you think of how good this

business model is and taking a couple basis points from every dollar that is spent, whether it is in brick and mortar or online, you still are using that source of payment. I just think it's incredibly powerful. And during economic growth growth this company is just going to keep chugging along so I think that's it for Visa and MasterCard after all that I don't own a position in either of them well I mean yeah I don't either but I do own a little bit of square and I'm looking to do that war on cash basket like Mr. Moser uh keeps mentioning on the motley fool podcast um so um having said that let's kind of switch and talk a little bit about the uh the downturn and i crunch a few numbers uh so for the past three days just so people sometimes it's easy to panic

or um for us i guess it's the reverse. We actually get excited. But to put things in perspective, so with the drops, the recent drops, the TSX is actually still up about 7% since last February, so one year out. And the S&P 500 is still up about 12%. So that kind of puts things into perspective a little more. So Braden, do you have one Canadian company and one U.S. company outside, obviously, of Visa and MasterCard for U.S. companies that you have on your radar?

And if this keeps continuing in the next days, weeks, months, that you'll be adding to your portfolio? Yeah, fair question. So I wrote a blog last night on my website, stridesfairinvesting.com, about software as a service companies here in Canada. And those four in particular, I know you said one, but I think they're all really exciting, which are Constellation Software,

OpenText, Descartes Group, I don't even know how to say that one, and EngHouse. These have been like 20 plus free cash flow compounders, incredible acquisition companies, and really, really good stories for infotech in Canada. So any of those, I own two of them for Stratosphere Premium subscribers. They've both done incredibly well it's really hard to not like constellation i mean if you if you have a bit of cash they

trades for like 1500 a share this thing is growing like crazy and they pay these companies are all paying small dividends too and the reason that they're small is because the stock shot up so much. When I say small from a yield perspective, the growth on the dividends have been insane, like 20 plus per year easily. So all four of those names are really, really exciting. I'm not gonna disclose which two I own for subscribers, but that's a very, very exciting space.

And then from the US perspective, I didn't prepare't prepare one man you got me on the spot here but i was gonna say visa or mastercard um no uh to be completely honest i'm gonna i'm gonna think about that i'm gonna let you go first and then i'm gonna come back i can do that um so one, I mean, that I've mentioned before, I already own a position is Canadian National Rail. So I think that can get a little cheaper still. I think it's probably going to be a mix of the whole market going down because of the coronavirus fears and a mix of the rail blockades that are going on. So there might be some more short term downturns for that. So if I can, if it can continue going down a little bit, I'll definitely add to my position. For US stocks, the one I would probably want to add outside of Visa MasterCard

is Lululemon. So one that we talked about. Yeah, that's one I'm getting a bit excited if it keeps going down. I'm nodding my head on video right now, by the way. Go ahead. Yeah. So those are just really solid companies. And we've, like I said, Lulu, we talked about in previous episodes, it's just like they have zero debt if i remember correctly i don't have the financials um but just a really good business strong brand um brand that i like i wear um my girlfriend wears so what's not to like about the business is my question another one if you want me to just use your u.s stock probably amazon so same thing if amazon with their web services i can get a little less frothy valuation um i'll probably buy one chair yeah you can buy a whopping

one chair i i like the lululemon pick i mean i really i'm not a fan of buying brands, but this one is just... The customers are so obsessed with it. I'm obsessed with it. You're obsessed with it. Guys, girls, everyone's obsessed with it. The quality is great, and you walk out of there and you spent half your bank account, and you still feel good about it.

So it is a really interesting company from that perspective. And then Amazon's also one of those companies that is just continuing to fire on all cylinders. I've thought the valuation is insane for a while. If the pullback was to happen, I mean, very, very exciting company. But I decided what my pick is. It's Tesla.

It's not Tesla. Oh my gosh. I wanted to short it. I wanted to short it at 300. That's still one that's like 850 bucks even after all this today. So I don't really get it. But no, honestly, I think the best two corporations in America right now are Alphabet and Visa. So those would be my hold forever type companies at the moment right now. And I'll even throw another one in there. I think Facebook is just extremely undervalued right now. I've thought they're undervalued for years. And if they're to be even more undervalued from this pullback, oh man, like that 25% growth on everything is unbelievable.

Everyone's addicted to Instagram. I don't care about this TikTok, call me a boomer. Everyone still loves Instagram. 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. Yeah, for me, I I think Facebook is definitely, it's a good value play when it comes to growth stock. I would not invest in Facebook just because I don't really believe in management. I'm not a big fan of the leadership. And that's like, that's fine.

It's, you know, it's investing. Not everyone agrees. And that's just for personal reasons. Like people won't invest in oil stocks. They won't invest in certain things. I decided a little bit ago that I would not invest in Facebook. But in terms of valuation, I agree with you with Mode, Instagram. Everyone seems to be on it.

It's definitely an interesting play from that perspective. Yeah, it is. And I think we're both aligned on what we avoid. And I get it, man. Zuckerberg has not been the most trustworthy guy when it comes to CEO. So I get that. I also invest with my morals. I don't invest in oil and gas, but that's not even because of my morals. I just think that the business is so unpredictable, relies on macro prices that I don't understand and the smartest economists in the world can't understand. So it's really, really tricky for me to get behind it. But from a TSX perspective, those software companies that I mentioned, they're moving to almost entirely recurring revenue with business to

business software platforms. And this is really, really sticky. If you work for a corporation, you have enterprise management software. How often are you like, oh yeah, we've been using this for 20 years. The reason for that is it's really expensive to switch over those platforms in terms of cost, in terms of training, in terms of what your employees are used to. So it is really, really sticky, that big enterprise management software.

So I think this is a really great place to be. And the numbers are supporting that. Yeah. I can, can disagree with you on that. So that we want to switch to our tip of the day now. Yeah. with you on that so that we want to switch to our tip of the day now yeah so the tip of the day relates to kind of this market craziness that we have right now you go on to CNBC's the end the Yahoo Finance is the Bloomberg's of the world and it is Dow loses record points because of coronavirus. And the reason for that

is that as financial markets grow, the Dow is higher than ever. So when it loses a big point drop, that does not necessarily mean that is the biggest percentage drop. So the Dow fell historically yesterday, 800 points was it? Which is 3% or 3.5%. So the market has fallen on a single day more than this, but that's not sexy for these news sources to financial markets, blood in the streets is what sells. And that's just the truth in the news world. So stay the course. I got a question from one of my subscribers today saying, hey, should I just sell my entire portfolio and then jump back in? And I said, one, timing the market is incredibly hard to do. Two, collect those

dividends. Three, buy on the way down because buying the dip, I actually really despise that term. I say, continue to buy on the downward trend, try to catch a falling knife. These are things that people never say. And the reason for that is it's actually realistic in execution. Buying the dip requires some sort of crystal ball. So just buy when stocks are attractively priced as the market goes down. That's my tip of the day. Yeah, exactly. I totally agree with that. So it's easy. I'm on the CNBC webpage right now, and it's like there's red everywhere, like big headlines and everything. It's just, it's obviously they have to sell news. They have to sell advertisements.

So there's a reason they do it that way. Always make sure you put things into perspective. Don't panic. Make sure you have a plan a small portion of your portfolio, whether it's 5, 10, 15 percent in cash or cash equivalents, which you can really easily invest in the market becomes important because then you'll be like Brayden and I. And you'll be kind of excited when you start seeing these these big drops in the stock market because you'll see buying opportunities. It's like it's almost like we're leading up to Christmas and like Boxing Day's coming.

It's that feeling I get. So I have companies on my watch list and same for me, don't try to time it exactly. It won't happen. Have some good companies that you're really interested in. You might find them still a bit overvalued. Just have a valuation at which you'll start buying the company if it drops to that level. And that's what I'm going to do for Visa and MasterCard personally, is I have a valuation in mind. Once it hits that level,

I'm going to start dollar cost average. So I'll split it in four. I have a certain amount to invest in each. And then in intervals, as long as it stays below that valuation that I priced it at, I'll just do that dollar cost average over four installments. Absolutely. And I get it. The coronavirus is a legitimate concern for the global economy as China is not back to work yet. However, if you are optimistic about business and companies growing over the next 10, 20 years, then there's no reason for you to not be investing in stocks if you have that time horizon. So stay the course. If you are not staying invested,

chances are you're going to miss some of the best days in financial markets. If you miss some of the top five performing days, you basically miss out on a lot of the gains on the entire year. So the key is to stay invested, continue to dollar cost average, and buy quality companies so that when these things happen, you don't have to question your whole thesis. I think that's really, really key. There is a stock screener available on GetStockMarket.com. I believe that more companies are going to fall into the screener as valuations get more attractive, which is really, really cool to see. Head over there. At the bottom, there is places to ask questions for companies we'd like to look at.

Thank you all who have submitted questions. Really appreciate it. We will see you guys next week. Thank you for listening to The Canadian Investor. If you were wondering what the tickers of the companies discussed today are, you can simply go to the episode description. Every episode, we try to put the tickers

of all the companies discussed. If you're listening from an Apple device, while you're looking up those tickers, if you can just take a moment and give us a five-star review. If you'd like to ask us a question at the same time, feel free to add it in the review and we'll tackle it in one of our upcoming episodes. Thanks again for listening. of The Canadian Investor. To get a list of the top Canadian dividend stocks right now and other valuable investing resources, go to GetStockMarket.com.