The Canadian Investor - Episode 19 - We Have Tech Companies in Canada too!

Episode Date: March 28, 2020

In this episode, we talk about canadian technology companies and more specifically the main holdings of the Blackrock XIT.TO ETF. We also discuss the recent economic stimulus announcements and finish the episode with our Tip of the D’eh!Tickers of stocks mentioned : MG.TO, GRT-UN.TO, SHOP.TO, CSU.TO, CGI.TO, OTEX.TO, BB.TO, ENGH.TO, LSPD.TO--- 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. Welcome back to another episode of The Canadian Investor. Simon, this is our second episode of the week. We are providing more content for you guys right now

during this wild, wild market and even wilder time to be live. And Simon, the podcast is absolutely popping off right now. We are the first thing on Spotify and Apple Podcasts when you search Canadian investing. So we're kind of a big deal. How are you doing, Simon? I'm good. I'm good. Yeah, we've been getting a lot of feedback. It's always great. So we try to incorporate the questions in our podcast as much as we can. And we do appreciate all the feedback, all the love we're getting. And like we mentioned on, I think it was last week, right? We'll try and do two a week.

We might not be able every single week, but we know there's a lot of stuff to talk about with the markets. And we're recording this on Friday the 27th around 445. So we have seen what's happened this week with the markets. Yes, sir. It is a crazy time. I'm not even sure what day it is. If you didn't just tell me, it is Friday. It is a whirlwind. I feel like I'm like a kid again on March break,

and I just absolutely have no idea what day it is. So today we're going to talk about, we can talk about the market a little bit and what's happened this week. The last three days were major upswing. And then today it's down another three and a half percent roughly. I think I looked at the market a lot less this week than last week. I don't know how you are up to, but job reports are coming out, and we are going into a pretty scary time economically. Let's not sugarcoat it. Unemployment rates are skyrocketing here in Canada and in theS. With small business not being open alone, that makes a huge, huge difference. So, yeah, what is your take?

Does anything really change between this week and last week or even when we recorded earlier this week? I mean, it still remains pretty much the same for me in terms of not trying to time the market or anything like that. My personal view on what happened this week, so obviously in the U.S. that had a big impact, so they just approved the $2 trillion stimulus package, I think, or 2.2, something like that.

That sounds right. Yeah, so that's a lot of money going into the economy. But what I found a bit confusing with the market reaction was, I think it was yesterday or the day before where the like worst jobless claim number ever came out with over three million people filing for unemployment in the U.S. And the markets were still up, even though the. Wasn't that the biggest Dow gain like since this whole mess yeah yeah it didn't make any sense especially since they had been talking about the stimulus package for about a week before that so you'd think that the market was already kind of pricing the the

stimulus package right in um yeah to me my personal view is that I didn't invest. I did not invest any money this week. I still dollar cost averaging. I think there's still a lot of bad news to come. And I would be very surprised if there's not going to be a lot more pain in the markets, but also health wise for people and like job wise. So a lot of people not getting any income. Obviously, there's stimulus package in the States. I think they're going to be sending $1,500 or $2,000 checks to everyone that's making under $75,000 a year.

And I know there's been extended employment benefits in Canada for those affected by COVID-19 in terms of employment. And today, Trudeau also announced some stimulus for small businesses, backing interest-free loans for small businesses, but also a payroll subsidy, I think, which they'll pay about 75% of people's pay of the business, they'll pay the rest. I think there's some conditions to all of that. But even with all that, I mean, I don't think the picture looks all that great for the economy.

It certainly doesn't. Like I said earlier, let's not sugarcoat it. The amount of stimulus that I see the Fed and the Bank of Canada throwing at the economy. It's just like wild. Every single day I look and they're coming up with a new way to provide stimulus. The Bank of Canada this morning lowered interest rates to 0.25%. So another quarter of a percent down. The U.S. Fed is zero.

So they can't go any further. And it's interesting, right? What an interesting time in monetary policy right now. It's unprecedented, it's historic, and the economy looks just horrible. But as I said last week, it's okay to be able to look at it and go, wow, the economy's definitely looked better, but still be aggressively buying stocks. That's what I'm doing. That's what I know you're doing. And you will thank yourself in the not so distant future. It might hurt a little bit in the short term when you look at your brokerage account that a position you entered yesterday or even four hours ago is down 10%. That's just really common these days. So that's going to happen. You're not going to time the bottom correctly. And if you do, if you know about this bottom please feel free to send

me an email that would be great i'd like to know when it is as well simon should we switch gears to canadian tech because i don't know why we haven't talked about canadian tech before this fires me up yeah probably because i don't know about it as much as you do. Well, man, like I look out on the TSX, on all of the companies that are available, and there are some real darlings in Canada that have big global or North American business. And some of these are just really good Canadian tech stories. Out of Ottawa, Shopify, a company that I think is tremendously overvalued and pretty much always

has been. But what a story. Even after this pullback, $65 billion in market cap, market cap. I believe this is the number right now. And we're going to talk about a ETF called XIT, which is the iShares S&P capped information technology index. And let's not kid ourselves, there is only 10 holdings and Shopify is 34% of it. Constellation, CGI, and OpenText make up another over, just a little over 50%. So you look at like 80% is Shopify, is the top four holdings. Yeah, 88 I think is the top four holdings. That's what I calculated. So you did the math. Yeah, okay, there you go. 88% is the top four holdings. That's what I calculated. you tend to think you're getting a broad diversification of stocks with ETFs.

And then you look at the math, like the total Canadian index, total market index, 16% is Royal Bank and TD. I think with all the big banks being over 30%. So just be aware of that. There's nothing wrong with that. I mean, some of these companies at the top, second biggest holding, 23% Constellation Software, has been a beast. Tremendous free cash flow growth. These two companies, the top two, Shopify and Constellation,

have been incredible stories. But my God, the top two Shopify and constellation have been incredible stories, but my God, they have rich valuations and Shopify still doesn't turn a profit last time I checked. So constellation though, very profitable, very good free cashflow compounder. So I'm happy to talk about my favorite four. But Simon, do you have anything you want to add about this ETF in particular? Yeah, I mean, yeah, just to add to what you said. So definitely you're essentially buying four businesses when you buy that ETF, just like Brayden mentioned. So I mean, there could be some value to that. One thing is the fees for the fund is 0.61%. So I mean, it's not super high, but it's not low either. So you might be better off just doing a basket approach,

depending on the sums of money that you're investing. Maybe not. Obviously, Shopify, just one share is fairly expensive on pure dollar cost, not like a valuation. Constellation trades for over a thousand Canadian, by the way. Exactly. So if you don't have several thousand dollars to invest, you might not be able to do a basket approach. So it really depends what your situation is. You could also look at doing a basket approach, but combine a few that you see here with a

few American tech businesses. That's another approach you could take one of them that I know a little better is Blackberry how they transition from the actual smartphones to I think a bit more security business but also an operating system business for like cars I think their their software is present in a lot of different vehicles the other ones I know Brayden can probably elaborate a bit more on that I know they're mostly business-to-business software so they do have a fairly strong competitive advantage and there's a high switching cost for all of them. My last thing I would mention of all of them, Shopify, don't you get the feeling Shopify might be like Amazon where we always look at it and it's like,

oh, it's so expensive, but it just keeps going up. I just, it kind of, I mean, I could be totally wrong, but it just, it feels like it could be that kind of story. 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, in 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. forward slash host. It does certainly feel like that story. I know I had some bet with my buddy Jeff way back like three, four years ago at least. And I was telling him there's no way that Shopify can continue to just lose so much cash and grow so fast like it is. And I boldly, stupidly bet that it would underperform. What an idiotic thing that was for me to say, because I clearly didn't understand how valuable their value proposition is as a company. It's very smart. Allow merchants all around the

world to easily be able to sell things on e-commerce. So yes, they're bleeding tons of cash. They went on the NASDAQ, raised tons of capital. And it's just this Canadian growth story formed out of Ottawa. They have like offices here in Toronto right beside my apartment. You know what? It is a good company. The value proposition that they provide is quite powerful. Now, another one on this list, Lightspeed Point of Sale Inc. is very small compared to them.

They actually dipped below $1 billion one week ago in market cap, and they IPO'd at like $2. So over $2, over $2. So the first time ever, they were under $1 billion in market cap. And since I looked at that, I was texting with some friends about Lightspeed, an unprofitable point of sale,sale small business retail technology company. Quite a cool business model, actually. It's up 88% since then, which is just absolutely nuts.

So they're going down with the retail pessimism, which rightly so. I mean, if it's not open, you're not making any revenue. So now that we've got those two out of the way, these are really fast growing, but still unprofitable businesses. So they would never make it to my subscription service. I would never recommend that. So I'm going to talk about subscription as a service or what's called SaaS, something that venture capital just can't get enough of. They just throw tons of cash at. And they've been one of the best performing industries in public and private financial markets. The predictable and growing revenue stream combined with very, very high gross

profit margins creates a pretty powerful compounding machine. And all four of these trade on the TSX and are business to business software, enterprise software, which is extremely sticky. And there's large costs and challenges when you're switching between enterprise software. So the software drives key process efficiencies for many corporations. And that's why they have such a high value proposition. So let's talk about Constellation Software, the second biggest one in that ETF. It trades at a very rich valuation, even after this pullback, north of 50 times earnings. $30 billion in market cap, a very, very small dividend yield of 0.3%. Very, very high return on invested capital, almost 40%.

10-year compounded annual growth rates of 25%, 27%, and 44% on revenue growth and revenue, free cash flow, and earnings, respectively. So this thing is beasting. 44% earnings growth compounded over the last 10 years is just nutty with 88% gross margin. So you are paying up for an enterprise software acquirer. They essentially just continue to buy and eat up more enterprise software with the free cash flow that they generate. So I'm about to be sounding off for a while, Simon, if that's okay. OpenText here, very, very similar, smaller, and actually

a really cool story that started out of Waterloo University in Waterloo, Ontario. Three or four professors started this company to try to digitize the Oxford Dictionary. So that's why it became Oxford, sorry, Open Text was the name that they came up with. So 16 billion in market cap, almost 40 times earnings, a modest one and a half percent dividend yield, very, very high return on invested capital, growth rates on revenue, free cash flow and earnings, all north of 15% and the dividend. So these are dividend growth stocks. All of them I'm listing are dividend growth stocks. And 67% growth margins.

So enterprise software, they bought Carbonite in Q4, which is a US-based security cloud-based software company. And OpenText has almost 90%, over 85% of revenue that is on subscription base. So you look at revenue, you look at the airlines we were talking about last week or on Monday. A plane sitting down on the ground, no revenue. This company, no matter how the economy is doing, over 80% of their revenue is on subscription. So they made some really, really nice acquisitions over the last years. Descartes Systems is one that I don't know as well,

but they do transportations and logistics. They don't pay a well, but they do transportations and logistics. They don't pay a dividend this one. And very similar growth numbers all north of 15 on revenue and free cash flow. About $5 billion in market cap and a pretty good compounder. I see you wanting to pipe in here. Yeah, I had a question for you. So reoccurring revenue, obviously, SaaS is great. But do you see any risk for some of them if they're really concentrated with some large clients or large businesses? Because obviously, reoccurring revenues are fine. But if the business goes bankrupt, that revenue goes away. So are there any of them that are really concentrated?

I know Shopify probably not because they have a bunch of small business partners but um some of the other ones uh that could be a risk for some of them so what i'll do is i'll tell you the ones that i know which are open text and enchouse these are these are companies that i've recommended in the stratosphere premium subscription for my subscribers over the last 12 months, I own them both personally. So for OpenText, for instance, this recurring revenue you're talking about, they are cloud providers and business partners for Amazon Web Services, Salesforce, and Google Cloud. So we're not talking about small players here. These are big, big companies.

And these companies power the internet and are very, very important partners for open text. So that's the kind of people that they're playing with. This is a serious partnerships that they have. So hopefully that can secure, ease your mind about the types of clients that they have. So hopefully that can secure, you know, ease your mind about the types of clients that they have right now. And then- What about if one of them would potentially drop them? Is that a risk?

I'm just kind of playing devil's advocate here. Yeah, no, no, no, that's fair. I want you to grill me on my thesis here. Yeah, very good question. I think that's the whole attractiveness of SaaS in general, software as a service, is that really sticky subscription and deep-rooted infrastructure in cloud computing. I don't think anyone right now with the coronavirus crisis, their first priority is to switch very, very important cloud-based infrastructure that their company relies on. I can't see that being a priority.

And it also requires physical infrastructure in terms of servers as well. So a lot of that work, I just don't see being a priority. And then additionally, nchow systems, another one I recommended for the Stratosphere Premium, very similar numbers, 17% revenue growth and 17% free cash flow growth generating. Very similar ratios in terms of open text. And they provide primarily call center infrastructure.

This could be, and they have already disclosed some partnerships that they've acquired over the last couple of weeks. This is a really, really positive tailwind for them when everyone needs proper call center infrastructure. And they're not going to go out and say, hey, this coronavirus, it sure is good for business. No way are they sounding off on the air like that. But let's be honest, there's a couple businesses that do get some tailwinds from this. And Enchow Systems is probably one of them. The market is not recognizing it for it. It's falling very similar to everything else, which is great for someone like me

who wants to pick it up for the long term. I'm done talking now. Wow, that was the longest I've ever talked on this podcast. I mean, yeah, everything's falling, probably except Teladoc maybe since I mentioned it. That's the only one that's doing well, but they had the same approach. They didn't want to really comment on how the whole coronavirus would help their business.

And I think that's good for management to not say, like, oh, this will be a huge tailwind for us. Like, I mean, if you're smart enough, you can figure it out whether it'll be a tailwind or not. Right. Yeah, the market recognizes it. it'll be a tailwind or not right yeah the market recognizes it but my god they're not going on the air or going through a management review uh report and openly saying coronavirus is great for business let me tell you if i heard management say that i'd probably like ditch that business to be honest it's disgusting it's disgusting yeah exactly that's it so um no i think that was a great overview i put you on the spot a little bit but the reason i did was to kind of make people understand the type of questions you have to ask

yourself about these businesses where yeah it's nice to have sass reoccurring revenues or or other types of business that are providing services to other businesses. But you have to keep in mind if they're super concentrated with a couple of large customers, if one of those customers goes bankrupt or switches to another provider, there's always a big risk with a lot of concentration. And I think a good example of that, I think you're familiar with it, is the Granite Reet. Yep. If I like, yeah. So they have, I think around like 50% of their building are with the Magna International as a tenant.

Yes, sir. Yeah. So that's, to me, that's the type of thing that's like super risky because if something happens with that business, it could really impact the results. So that's all like, just to understand a bit the reasoning

when we look at businesses, some of the questions you have to ask yourself. That's a good point because I used to own Magna. I issued a sell to my subscribers on March 4th. If you look at their stock chart, it looks like I have a damn crystal ball. But yeah, I know that business really, really well. And Granite Real Estate Investment Trust is actually a spinoff from Magna. So what they did was they owned all of the real estate at one point.

They spun off the Real Estate Investment Trust as an industrial REIT and then re-leased it back. And basically, Frank Stronach, the founder and CEO at the time, way back when, of Magnet International, he basically owned both companies. They were both publicly listed, but a major, like a major, major shareholder in both of them. So you bring up a good point. You got to think about what's the exposure that they're, just like when we're looking at these ETFs, you know, what's the exposure of the portfolio inside the holdings for real estate investment trust? Who are the tenants? of the portfolio inside the holdings for real estate investment trust, who are the tenants? 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. That is Airbnb.ca forward slash host. Yeah, exactly. So those are really good questions to ask. And especially in a time of uncertainty like this, you really want to be digging in a bit more into whatever you're looking to invest in.

So now I think, did you want to pivot to our tip of the day? I'm eating an apple right now. You got it. So yeah, I got it. So our tip of the day. I'm eating an apple right now. You got it. So yeah, I got it. So our tip of the day. So you guys know that we're strong believers in staying invested, not panicking, not selling, dollar cost averaging. But it's important to know

and it's really important for people to understand that even though we preach an emergency fund, we also understand that not everyone would have an emergency fund. And if someone without that kind of backup money ends up in this situation where they lose their job, they lose their income, and they're in a really difficult situation financially, even if the market is down, it might make sense to sell some stocks, even if they're good companies, to make ends meet. I think I would prefer doing that over getting into debt personally. I think that's a better option. It's not ideal. Totally understand it. And obviously, that's why we preach having an

emergency fund for these types of situation. But in some situations, it might make sense to sell it. And as a side note, if some of our listeners are in a tough spot financially, and if you have a locked-in RRSP, I'd recommend contacting the Canada Revenue Agency to see if you could potentially withdraw from it. Usually, you won't be able to until you retire, but there are some hardship provisions. I have no idea if they would allow it in these type of circumstances, but they might be a bit more flexible. So that's something you can always do.

Look, we understand, we try, we're I think pretty easygoing when we talk during the podcast, but we also understand that there's a lot of people that are impacted both from a health perspective, but also financially because of everything that's happening. It's a good point. None of it about this is ideal. So if you have to sell stocks for a life thing, then you got to sell stocks. I feel bad.

a life thing, then you got to sell stocks. I feel bad. I know someone that just had to close on their house last week and pay up on that down payment and withdraw on stocks and everything was gravy until it wasn't. So that does suck. It's not ideal, but that is life. That's why if you need the money in the short run, if you need cash within the next year, no matter whatever's going on in the market or not right now, just in general, one year ago, if you needed money now, one year ago, you should have been de-risking your portfolio anyways. If you need money within a year, stocks is not the place for it. Stocks is the place for five, 10 longer years in terms of money that you need. Stocks have been a great, great place for long-term compounding. But as we've seen, it can be very volatile. Things like this come up. I mean, not saying that pandemics are very common, but massive downturns in the market is not new. Nothing about this 25%, 30%, 35% drop in stocks is new.

It's actually not new at all. And history does not repeat itself, but it does rhyme. I can sound us off here. How are you doing? I mean, no, that was really good. Totally agree. The last thing I would probably say is I definitely have a few friends that just got laid off recently. So I do know like whether people are listening, it's happening to them or they know someone who like who's been affected. It's probably I'm sure everyone knows someone.

So one last thing I would say, make sure you visit Service Canada because there are some new unemployment benefits that were announced by the federal government you might be eligible for that if you're impacted and you lost your job due to the COVID-19 and that can all be done virtually correct yeah yeah most of it I think pretty much all online they'll probably need your record of employment from your previous employer but they'll'll let you know exactly what they need and you'll be able to see if you're eligible or not. But we're also trying to help people from that perspective. So I wanted to mention that. And the last thing I wanted to say is we're going to look into creating a Facebook page for the podcast. i'm i'm the one that's going you got this bro yeah i know i'm way too busy i mean oh yeah it's all good so i'll try to create that um if you guys

are interested definitely let us know um and i think it'd be a great place for people to submit questions for the podcast create some discussions as well um so i'll look into doing that in the next few weeks probably this weekend but I do have other things to do so it all depends on my availability but it is on on our radar could we just include that could just include a link to the Facebook in the show notes yeah yeah when it's available I'll definitely include in the show notes where I put the yes the tickers for the stock we usually talk about in the podcast. Beautiful. All right, guys.

That does it for this week. And that was the second episode of the week. Wow. Interesting. Okay. So we will see you on Monday or Tuesday. How are we doing, Simon? What do you think?

Yeah. Yeah, around there. Just stay posted. We'll at least have one next Just stay posted. We'll at least have one next week. We'll probably probably I'll probably forget when Monday is. All right, guys, we will see you when we see you. Thanks so much for listening. Thanks for all the feedback. Really appreciate all of it means a lot to both Simon and I go to get stock market.com. As always, Simon and I. Go to getstockmarket.com as always. Keep firing me those questions.

And yeah, that's great. Okay. Thanks, guys. 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.