The Canadian Investor - Episode 8 - Canada Goose and Two Stocks to Put on Your 2020 Watchlist

Episode Date: January 20, 2020

This week on The Canadian Investor Podcast we discuss two stocks to add to your 2020 watchlist. We then talk about Canada Goose and we finish the episode with another Tip of the D’eh! Tickers of stocks mentioned : BAM-A.TO, GOOS.TO, ETSY, CHR.TO, CJR-B.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. Hello everyone and welcome back to The Canadian Investor. I'm Brayden Dennis and I'm joined by Simon Belanger.

And today we're going to do something really fun that we hope to do every single quarter, which is pitch a particular stock to each other and then allow each other to give each other feedback on if they like the idea, if you think it's a crap idea, fully allowed to roast each other and give our thoughts and insights on the kinds of things that we're thinking about when we're picking individual stocks. So how's it going, Simon? I'm doing well. I think we talked a bit about my upcoming move. So it's been a bit of a crazy week,

but I was able to look into the companies that we'll be talking today. And also we'll look at Canada Goose as well a bit later on. And of course, our tip of the day. Nice. Yeah. So I am recording with a brand new mic. We're making this stuff real professional now. I probably have all the settings wrong, but that's okay. And we're going to kick it off. So Simon, I'm going to let you go first because I can't wait to roast you and then maybe come around full circle because after I look at this growth, it is pretty impressive.

Go ahead. Yeah. So the company I selected is a company I started position in about a month and a half ago if I remember correctly so some of you might be familiar with it's Etsy so ETSY the ticker is ETSY as well so easy to remember so if you're not familiar with it, Etsy is a marketplace where sellers will go and sell craft goods. So they'll usually take a percentage of each transaction. It's a very niche market. It's a pretty small company overall. So market cap of $6 billion compared to, for example, larger marketplaces like Amazon, for example, who has, I think, over, are they a trillion dollars now?

Something like that market cap. So there's a lot of things I do like about Etsy. It's probably a bit different of the companies that we've talked about so far. So it's definitely a growth company. They are profitable. They have good profit margins as well. They are quite expensive on traditional metrics, but they do have a very good stronghold on that niche market.

Even so that Amazon a few years ago started to wanted to compete against them and start something that was more focused on Kraft's good. And it didn't work very well. And Etsy is actually still thriving in an Amazon world, which is pretty impressive because as we all know, Amazon has been crushing a lot of companies because they're just increasing their market share when it comes to retail. So Etsy has actually been share when it comes to retail so etsy has actually been doing very well they recently purchased reverb so reverb is a a company that specializes in selling new and use music gear so they bought that for 275 million in cash last summer and they're still it's under their umbrella but they're still letting it operate on its own.

And it goes very well with their business being a bit more niche specific markets. So I think they're actually going to incorporate that very well in their business. So Brayden, I'll give you a chance to talk a bit about it or ask me some questions and then we can look at the financials a bit more for them. Sure. So my God, this company is expensive at 60 times earnings, but we already know that they have posted impressive over 30% top line growth. My question for you is how are their margins so high if it's a marketplace? And this is coming from someone who doesn't even really understand etsy um because just based on their products i would probably not be you know their target market however how are they posting these gross margins of like close to 70 percent when it's a marketplace do you have any insight on that, I'm not sure if I were to just kind of

venture in it, I would assume that they have some pretty stable general like expenses overall, obviously, they'll increase, but I think their expenses won't increase as quickly as their revenue as a percentage. So that's always a good thing to see. So that would be my best guess. I did start a very small position in them just because I was familiar with the company and it's part, I think we, I'm not sure if we discussed this on the podcast, but I tend to keep most of my holdings in very solid blue chip dividend paying companies. But I do keep a little like 10, 15% in like my fund portfolio, which I invest in companies that are higher growth probably the metrics aren't as attractive as some of the companies we've talked about um so that would

be my best guess i know a few years ago they increased the fees a little bit um so that did increase the margins as well and they're uh doing pretty well overall they don't have um if i remember correctly they don't have a lot of debt. So they look really good from that perspective. They also are pumping a lot of free cash flow and growing very quickly. So and what I really love about them is that they are Amazon resilient, at least as far. Yeah, that's a good point, because that would be my next question is who is their competition? I think they operate in a really interesting niche with these craft goods, the types of things you'll see on Pinterest perhaps.

And you're right, they are pumping times enterprise value to free cash flow, which is not crazy considering the free cash flow growth, the top line growth, and the other kind of hot stocks like this one. However, they have pulled off like 30% from their high back in, was it 2018 or 2017? I didn't realize that this company IPO'd back in was it 2018 or 2017 um i didn't realize that this company ipo'd uh like back in 2016 i thought they were like a 2018 2019 ipo so it shows you how much i know about this company but

i mean yeah i mean i think they do have a lot of potential and they have a really interesting niche yeah so in terms of competition obviously amazon would be one player ebay would also be another player that would be competition against them i would say to some extent shopify as well too those are probably the three biggest things in terms of competition but again everything's showing that even though uh amazon and shopify ebay is kind of stagnant a little bit but those two are been growing really rapidly even despite that it's been doing really well in terms of the pullback i think it was really due to their recent earnings where they came in a slightly below expectation but still really good growth and

like we've said it before growth companies that's what you're kind of dealing with. If the company doesn't oftentimes at least meet or exceed expectation, even if they're doing super well, you'll usually see a pullback in the stock. 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 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. Yeah, that makes sense. So I find it very interesting as well that they're providing

a service that makes it really easy for people to sell their products on an open marketplace, kind of similarly to a Shopify because it's right here on their company profile. Etsy Payments is big for them, which is the payment processing service. And then Promoting Listings is another source of revenue, which is advertising that allows sellers to pay for prominent real estate on the site essentially. And then providing all the shipping and logistics for the marketplace users, similar to a Shopify. So you're seeing those kind of out of the box, really easy solutions for small business do really well. Shopify is about to hit $600 Canadian dollars. Those

companies are doing extremely well. That one's pumped to the moon, their share price. I don't hate this one as much as I thought I was going to. Okay, yeah. I think that's a good overview for Etsy. What's your pick, Braden? Good overview for Etsy. So what's your pick, Braden? I am going to be super boring, and I'm going to talk about a Canadian core holding. If you're Canadian and you don't own this stock, what are you doing?

It is Brookfield Asset Management, ticker BAM.A. And Brookfield is, well, they're a global player. So let's just go with that first. And I think they fly under the radar as a Canadian company, but truly they are a global company. in their companies, which are the Brookfield Renewable Energy Partners, Brookfield Infrastructure Partners, Brookfield Property Partners, and Brookfield Business Partners, which all four of them are listed stocks that you can buy individually. So if you want more exposure to one company over the other, or you can just own BAM, which holds a controlling stake in all four of them. So as I mentioned, they're a global diversified capital allocator, and they are very good at it. They're consistently growing free cash

flow, 15, 20%, same with earnings and the top line. So they're a free cash flow generating machine. And essentially what they are is they're global value investors in essentially infrastructure projects and real estate projects. And they do extremely well in emerging markets and they thrive in a low interest rate environment like this. In this kind of interest rate environment, this has to be a core holding for you, long term growth. And they have had a really successful track record of taking certain assets, undervalued assets, maybe distressed assets, turning them around and making it a very good story.

And it's just been, I mean, management's been very, very good at it. So I own this in my own portfolio and I recommend on the Stratosphere Premium Newsletter, which follows my real portfolio, as a core holding for Canadians, this is a good place to start. Yeah, so I'll try to find a few negative things to say about Brookfield Asset Management. I didn't do a very good job picking one that's controversial because, I mean, it's hard't own Brookfield Asset Management, but I do own Brookfield Infrastructure Partners and Brookfield Renewable Partners because I wanted more concentration. Actually, no, I also owned Brookfield Property Partners. So I own all of them except the main Brookfield Asset Management. You'd rather incur more transaction costs. Yeah.

So I'm going to ask you, so aren't you afraid of in this climate for Brookfield Asset Management? I know I can tell, obviously, I'm looking at their balance sheet right now and they have a lot of long term debt. I think over 100 and close to 120 billion dollars in long term debt. So are you concerned about the rising interest rates? so are you concerned about the rising interest rates and the other concern that i might have is also we're seeing institutional and investors uh kind of doing almost bidding wars in cash flow generating businesses i know recently the canada pension plan bought pattern energy group for quite the premium so are you afraid that they'll have trouble finding actually good value in this type of environment and obviously the debt load?

Yeah, I mean, those are two very good questions. So I'll address the capital structure first. So it is a one times debt to equity currently right now. And the reason that that's okay is one, we can expect that from a real estate capital intensive infrastructure business. So that is to be expected. And the amount of reliable cashflow, free cashflow that they're generating, this is not a concern for me at all in terms of the safety of being able to pay back those long-term liabilities. So if they had fluctuating free cash flow or even just a fluctuating business model in general, with unpredictable cash flows, I'd be much more concerned. But with Brookfield, I think it's less of a concern.

And if you see here, they're only paying out 17% of earnings to the dividend in 2018 or 2019. No, just for 2018. And they are growing the dividend very quickly. It paid 52 cents in 2015 and now they paid 81 cents in 2018. So they're growing it considerably fast with a low payout ratio and consistent free cash flow. Not a concern for me, but very good question. And then your other question was around... Getting value. Getting value.

Yeah, finding value in an environment where their institutional buyers are fighting for these cash flow generating businesses. This one, I actually really strongly agree with you. This company, like institutional buyers, can't get enough of this thing. Like any of the Brookfield names, they can't get enough of because it's just popular with institutional investors for the amount of cash flow that they're producing.

Free cash flow is this finance nirvana on Bay Street and Wall Street. So I do get that. And especially for pension, you know, pension manager, very happy to be in this name. And because of that, you know, the valuation does get pumped up. And I like to go to places where, you know, people aren't necessarily looking, you know, like $1 billion to $2 billion in market cap. And that's the kind of opposite story here at $77, almost $2 billion in market cap. And that's the kind of opposite story here

at $77, almost $78 billion in market cap, which is big for a TSX stock. So to your point, yes, I agree with you. But I mean, they're growing earnings double digit, like 20% consistently, with no signs of slowing and a lot of potential in emerging markets like india per se and uh you know all around the world it's hard not to own this name yeah they've grown their free cash flow they double dip in the past five years so that's really interesting and even the payout ratio when you look at the free cash flow it's super low too. So, I mean, I do like the company. I think every company is going to have some risk. But definitely, I think BAM is a solid holding. The ticker is just awesome too.

And if we have American listeners, it's also listed on the New York Stock Exchange. This is true. And it flies under the radar because it's a Canadian-based company. This is true. And it flies under the radar because it's a Canadian-based company. Yeah, they collect fees on every single corner of what they do in terms of managing capital, deploying capital, like they just are bearing fees all over the place for their investors. And yeah, I mean, this is a good place to be. It's kind of like Visa, where they collect revenue from kind of all parts of the transaction. And if you don't pay it, well, now you're going to pay more in fees. So it's hard not to like. Okay. So I think that's good for our two companies. So the next one we'll be talking about is

Canada Goose. So we had requests to talk about that company. I can get started on Canada Goose. So while I was dissembling some IKEA furniture, I was listening to their most recent conference call. So I heard a few interesting things over there. Overall, they're doing quite well in their revenue if we look at the wall since they've been they've been public they've actually been increasing at a quite nice clip there are a few things that I did notice I know their inventory is actually going up a little bit in terms of what they have on hand a management

was saying that they are fine with that that it actually allows them to fill orders a bit quicker they also have been saying that their direct to consumer sales have been increasing so when the company for example you go on their website and you purchase directly from them instead of going for example to nordstrom and purchasing to nordstrom so it's always good to see that because the margins are higher for those type of sales they said they've also been doing pretty well in china even in hong kong where there's been some challenges obviously with the political climate over there so it's it's definitely an interesting company i would be i'm a bit not skeptical but for the inventory that's

something I would keep an eye on for anyone looking to invest in Canada goose mainly because that can become a problem if it doesn't play out like management is saying they do have a lot of pricing power right now but if you have too much inventory and you need to start discounting that will become a problem I haven't seen that myself personally, going to Nordstrom or stores like that, but it is something that could happen. So yeah, what about you, Brayden? 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 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. Yeah, I think for them, what they have to do is not discount anything and take the Lululemon approach of only selling on their locations, their website, and keeping it as a premium product and keep those margins, you know, as they are over 60% gross margins right now. And they're doing something very interesting. I was at the mall the other day. People were lined up outside to, you know, go into the store. And apparently the store has no inventory

i really i didn't go i didn't go in and so i was looking it up and they're doing this like this pilot with they have stores with no inventory it's like well that's kind of crazy so they're taking like a tesla approach where you literally get cash up front and then just deliver it later um very interesting i don't i don't know how that pilot is doing, but it looks like they're trying to innovate in the space. I think they have to take the premium model of what they currently have. Their jackets are like 600 bucks.

Yeah, if not more, I think. If not more, yeah, it's probably the cheapest one. And they're doing really well in Asia. Yeah, the brand is really strong. When they IPO'd, it was probably the cheapest one. And they're doing really well in Asia. Yeah, the brand is really strong. When they IPO'd, it was kind of like, whoa, this is really expensive. But now you're like, okay, this massive pullback, trading at 34 times earnings, this massive pullback due to using fur for their product, a lot of people are against that.

They're seeing how they can battle from that. It's taking a huge hit on their stock. 34 times earnings for 40% revenue growth and 40% earnings growth. That's pretty attractive. Yeah, exactly. There's a lot of things to like about them i would probably just use a wait and see approach um just keep an eye on the some of the things we've mentioned they

are uh doing pretty well too from a cash flow standpoint so they have uh free cash flow um but definitely yeah it's a premium model um that's something i would definitely keep an eye on i love things that are companies that have really strong brands and pricing power. But again, that can shift pretty quickly. Yeah, and you know what's actually really funny? I was looking at the stock. I'm like, oh, no, climate change. No one's going to buy jackets in two years.

And then I was joking about that. And then I actually haven't worn my like heavy winter coat yet in toronto this entire winter oh it's january what what is it today the the 16th yeah yeah yeah january 16th and i haven't worn my winter jacket today yet this year it's because you need to move to ottawa trust me oh no thank you man no. No, it was like plus 10 last week here. I mean, it bounces around, but it's, yeah. I think they're also trying to actually branch out in like other types of like outerwear.

So that's something to keep an eye on. The brand is really strong internationally too. Like I've been, I've traveled a lot and I've seen the jackets not in Canada. It's kind of always surprising. I didn't realize that it had such a global presence. The Asian markets love these jackets. Yeah, especially in China. There's a really strong market for luxury goods and definitely that would uh would fall within that so they're currently trading for five billion in market cap do you think

you would consider entering position after this kind of huge fall in their share price in the last six months i mean mean, that's something I could consider. Their fiscal year actually runs from like halfway through the year. So it's I think now they're in they're about to report their third quarter of 2020. I'd probably wait until they report their fourth quarter just to get a better sense of what's been going on. And oftentimes to management will provide guidance, give a bit more more more insightful on the business going forward so that's probably the approach I would have honestly until someone brought it up to us I thought it was super expensive and there's no way in hell and now

it is something I have on my watch list yeah good point because the IPO was that was the reaction and then i haven't looked since and you know the story is there it's i mean these numbers are quite impressive yeah exactly um so i think did you have anything else for uh canada goose no i think we can move on to our tip of the day yeah so i'll let you do this one because uh it was your idea and then i can always chip in at the end. All right. So my tip of the day is something I see beginners make this mistake all the time, which is chasing dividend yield. All the time I get questions from new investors about companies paying 10 plus, 8 plus percent yields. A lot of the time the yield will be really high due to significant problems in the company which means that the share price just

falls off a cliff and then there may not be room in the any growth in the payout because they're already paying out so much so look out for the payout ratio if it's over a hundred percent be very cautious and if it's a company that's not growing at all, you're going to typically find higher yields. But if you're a long-term investor, is that what you want to be? I know it's easy to try to lock in 10% yields or 8% yields because you think, oh, I can make this much money every year in passive income, but might not always be the best idea for your investment portfolio. Yeah, so I totally agree with that.

Never only look at the yield, definitely look at the payout ratio. I think we've said it a lot. I really like the payout ratio when compared to free cash flow because that's the money coming into the business. And the yield, I mean, you have to also compare. I find this is a really good spot to compare with industry peers because you'll have certain industries where, for example, Brookfield Renewable Partners, their yield, I think, is around 5% or 6%. They have a higher yield, but they have very constant cash flow that is growing. is growing um so that's the yield is higher but when you compare it to its peers it makes a lot of sense and the um the funds from operations as well but if you have a company especially

for example in tech that's paying a six percent yield i would be super alarmed by that because that would be um that would be completely crazy compared to its peers so that's one area that i do like to compare with industry peers because that'll give you a good idea. But definitely anything above 5-6%, just make sure you do a lot of research on the company. And if there's anything double-digit, I wouldn't even look at it. Yeah, no, for sure. Yeah, no, for sure. If anything is yielding higher than Enbridge and the banks,

just take a double look of why that is because those are some of the most stable cash flows in the business who are able to do that. So that would be a good comparison. See what Enbridge is paying, and if they're paying more, be careful. Yeah, exactly. I think what – wasn't GameStop that had like at some point a 15% yield or something like that? If I hear GameStop one more time on this podcast, they're so easy to make fun of. Yeah, no, they were paying like 15% or something crazy because the share price fell off a cliff.

Yeah, another one that had a crazy high yield and then resulted in a dividend cut people can look that up is chorus entertainment it's trading on the tsx so that one at some point i was doing a screen and came up and i think maybe less than six months after that they cut the the dividend in like two-thirds or three quarters so um yeah usually a high yield means that the stock has gone down they've kept their payout the same uh but there's oftentimes a good reason why the stock has gone down and shot up the yield that's a good example i was looking at different airlines and i've always spoke about how i thought air canada was extremely undervalued back in 2017 at like four and a half billion in market cap it trades for almost 15 today and he's like no i'm gonna go into into chorus and uh i was like i just look

up chorus and it had an eight eight and a half percent yield like whoa that's instant red flag like why is this airline paying paying that much so yeah cut the dividend it wasn't safe boom well chorus is not an airline chorus is uh sorry sorry yeah yeah no it's uh it's they own like global and all that so they got spin-off by uh shock communications sorry not chorus what what is the what is the aviation or something i think there's another airline that was in the same situation okay well there you go any two of the chorus uh is a good example for people i think i know what which one you're talking about unless i'm just like this again this was years ago unless i'm mixing two stories up which would also be hilarious but that is a good example

i love how we were talking about different companies potentially yeah yeah there is a chorus airline though no i'm pretty sure there is I love how we were talking about different companies. Potentially, yeah. There is a Corus airline though, no? I'm pretty sure there is. For the sake of the podcast, just agree with me at this point. Yeah, exactly. We can probably come back on in the next episode. Yeah, exactly.

We have to address this next time. All right, guys. Thank you so much for listening to this week's episode. As always, check out GetStockMarket.com. I actually revamped it this week and have a live stock screener you can use right on the website now. So I think it's a really cool tool. This is a good place to start for looking for high quality growth dividend stocks that are not extremely overvalued. this is a good place to start. Thank you for listening. 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 right now and other valuable investing resources, go to GetStockMarket.com.