The Canadian Investor - Have Retail Stocks Become Too Cheap to Ignore?

Episode Date: May 30, 2022

In this release of the Canadian Investor Podcast, we cover the following topics: A look back at a letter from Warren Buffet in 1977 about inflation Major retailers and their current valuations What to make of stock based compensation Tickers of stocks discussed: WMT, HD, COST, DOL.TO, CTC-A.TO Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense. Check out the Yes We are Open Podcast from sponsor MonerisSee omnystudio.com/listener for privacy information.

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

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It is May 25th, 2022. My name is Brayden Dennis. As always, joined by Simon Belanger. Simon, we got a good episode for y'all today. If you are new here, we do episodes on Mondays and Thursdays. Mondays, regular thoughts, investment strategies, what's on our mind. And Thursday, we round up all the latest news and earnings release. Today, we're going to talk about inflation retail you got a quite a

lengthy segment here on retail and then we're going to talk about stock-based compensation and round out the episode with what's on our watch list presented by the beautiful people at eq bank how you doing simone i'm doing well uh yeah it'll be a fun episode. I'm also excited. I have a prenatal class afterwards and a softball followed by softball at like 9.30. So, I'll be going to bed late. That is full dad mode evening. Yeah, yeah. Wow. I actually got pushed.

It was last weekend for the prenatal class. But because so many people were out of power, they had to push it to this week. I love it. Well, it's that time of year for the softball too. So this is a good evening there for you, Simone. All right, I'm going to start today with an old, very old excerpt that I came across, which was Warren Buffett writing about inflation in 1977. So several decades ago, Buff talking about inflation. I thought this was interesting because you don't see him speak like this anymore, given his status.

He just doesn't want to deal with anything political because he just doesn't care anymore. And he'd rather just stay away from hot takes. You know what I mean? There's just nothing for him to gain on being hot takey anymore. So this segment is called The Number That Nobody Knows. And that's what Buffett called it in his writing, The Number That Nobody Knows. Which brings us to the crucial, so this is quote, which brings us to the crucial question, the inflation rate. No one knows the answer on this one, including the politicians, economists, and establishment pundits who felt a few years back that with slight nudges here and there, the unemployment and inflation rates would respond

like trained seals. But many signs seem negative for the stable prices, the fact that inflation is now worldwide, the prospensity of major groups in our society to utilize their electoral muscle to shift rather than solve economic problems, the demonstrated unwillingness to tackle even the most vital problems, energy and nuclear proliferation. If they can be postponed and a political system that rewards legislators with re-election if their actions appear to produce short-term benefits, even though their ultimate imprint will compound long-term pain. Most of those in political office, quite understandably, are firmly against inflation and firmly in favor of policies producing it.

This schizophrenia hasn't caused them to lose touch with reality. However, congressmen have made sure that their pensions, unlike practically all granted in the private sector, are indexed to cost of living changes after retirement. Okay, one quick thought here before I hear what you have to say, which is his writing is so good. And this is him at the top of his game. His writing is just incredible, straight to the point, witty, good use of the English language. He touches on two really important things here, which are no one knows it, even the economic pundits who like to talk about it, including us, no one knows what the actual number really is. Everything's in estimation. And that all policies, especially now, this comes true more than ever, all policies seem to be

on inflation, short-term reactionary moves that can inflict longer-term pain. And I think that that is what the name of the game has been recently. And so, I just wanted to pull this up because what he said in 1977 is ringing true, really pronounced in daily life today. Yeah, yeah. I mean, first of all, first reaction was like, oh, shots fired by Warren here. But I mean, it's still, second reaction is that it still applies amazingly today, right? You look at the political landscape. I'm not going to get political here, whichever, you know, way you're leaning politically doesn't matter. It's just for the most part, right? You

have politicians that yeah, they're screaming that inflation is high, whichever side of the aisle they're on. But then again, when they do propose new policies, oftentimes, it's actually, you know, policies that will do the opposite where it'll stimulate inflation even more., it's actually, you know, policies that will do the opposite, where it'll stimulate inflation even more. So it's definitely interesting the way that you worded that. And it's still, unfortunately, very present today. It's true, right? We as humans, we're very, very good at making decisions that help us with a short time horizon, not so much looking beyond. That's true for investors. That's true for policymakers, decision makers of any kind. It's easier to make the decision for what seems like the most obvious decision for right now,

even if it can cause problems later, or even if you're setting up your portfolio for the short term and you realize it might not be the best for the long term, the human brains are not very good at optimizing for that kind of problem. Warren has done exactly the opposite and always thought longer. He's always thought in longer time horizons than anyone else. And that's the secret to his success right there. Yeah. Yeah, exactly. And I mean, obviously for some people it's easier than others, especially depending where you're at in your life. If you're already in retirement or very close and looking to draw on your RSPs or defined contribution pension,

it's definitely not an easy situation. And there's, you know, even the best financial planners out there will have probably a lot of trouble trying to create a good plan for you, just because you don't get much in terms of return for interest. If you invest in fixed income, you'll lose purchasing power. And then if you're needing to have some income for your retirement, you have to be careful with having too much equities as well. So it's not an easy situation for some people, but those who are younger, my age group, your age group, I think for the most part, obviously you feel it day to day, but if you're able to still put some money aside and not look at your

investments on the hourly basis, I think you should be okay. Let's shift gears to your segment here on retail. We've seen valuations implode. We've seen reports coming out of overstaffing, layoffs incoming, huge inventories, but also a mixed bag of guidance moving forward across these giant retailers. So take it away here. My only rounding out thought here on the Buffett thing is the writing style back then, something about it I really like. I'm not sure what it is. It's a mix of different use of language, but also there's no fluff. Maybe it's just the fact that he is super high IQ and a very good writer, but I like the style from back then. Yeah. Yeah. It's hard to not to like it. Yeah. The next segment, I mean, I titled it Retail Bargains? And obviously in our latest episode where we talked about earnings

we talked about some of the large U.S. retailers and how the start of the year has been for them for the most part it's not been great but again it's not been across the board even though the market has seemed to be kind of reacting just in one way for a lot of these names and I wanted to have a look if there's some potential bargains here so I took five names I included two Canadian names in here obviously there are some large retailers that are not in here so take this you know this is just kind of a sample that I decided to do the five names are Walmart which by the way is down 20% over the last month. Canadian Tire, down 8% over the last month. Costco, down also 20% over the last month. Home Depot, which has been pretty good over the last month, but still down 25% over the last six months. And then Dollarama. Dollarama is actually

the exception to the rule here. It's actually performed quite well over the last six months. exception to the rule here. It's actually performed quite well over the last six months. So I think it's the only one that's actually up over that time period. I will elaborate a bit more on each. All these businesses for me have four things in common. Most likely they have a bit more in common here, but these are kind of the obvious one that came to mind. Economies of scale. They pay a dividend. They were all there during the Great Recession, so 2009, 2010, around there. And they have historically generated consistent cash flow. Any comment before I get into the names? So the list here that you're going through, wait, did you list them just now? Yeah, I just talked about them, but I'll go into more detail for each.

Yeah, yeah. So Walmart, Canadian Tire, Costco, Home Depot, Dollarama. So it's a good mix of US and Canadian names here for the segment. Yeah, all in fairly large drawdowns, especially those US ones. You could argue that they got a little too stretched for sure. But you're looking at some enterprises who have, I would go as far to say mastered retail, Costco, Walmart, Home Depot. I think those are probably the best highest quality three retailers on the planet. And they have literally mastered this and they're obsessed with it. And I could go on and on about Costco's

obsession with operational excellence, but I just wanted to say that this is a high quality list for the most part. Yeah. Yeah. And that was my point, right? Just to look at these names, because I think for the most part, they're very quality businesses. So I'm going to go here by largest in terms of market cap. I did do this over the weekend. So bear with me if it's, you know, a few percentages off. So let's start with Walmart, the largest of them all, market cap of $330 billion, approximately. Sales are $ 572 billion on a yearly basis. And for all of them, I use their most recent full year data. So keep that in mind. I know they all have had some quarterly release. The five year average revenue growth is 3% for Walmart. Not that surprising. I mean, they're so massive that you're not expecting crazy growth from them.

Gross margins of 25%, net income of $13.7 billion, free cash flow of $11 billion. Free cash was actually ranged quite a bit over the last 10 years, which, you know, props to you, Brayden, I pulled that from Stratosphere. so it has ranged between 10 and 25 billion over the last decade so quite a bit range and it's not been like kind of straight line it's been a bit all over the place they have a return on invested capital of 6.37 percent they're currently trading at around 24 pe and 30 times free cash flow. Again, just using the latest year here, not their current year that they're in. And the last five years, just for an idea,

the price earnings ratios range between 15 and 50. So at 24, it's definitely towards the bottom of that range. They pay a dividend yield of 1.9%. And has grown their dividend just shy of two percent on average over the last five years i actually expected more than that for their dividend growth they clearly you know everyone knows walmart it's the largest brick and mortar retailer in the world but they're not just brick and mortar they have been investing heavily into e-commerce well before the pandemic i would say five plus years that they're really putting a lot of money into that.

And it's reached almost $50 billion in revenue just for their U.S. store or their U.S. operations alone. Is it cheap? It's hard to say right now because they're definitely experiencing some headwinds. If you listen to the earnings episode, they burned around $7 billion in free cash flow just for that quarter. And they did say that they're going to face some headwinds, at least until the end of this year. They were not shy about that. They're facing inflation head on. Supply chains have been a big issue over stocking as well. So it's a name that's interesting, but you definitely need to do

some research in terms of what your expectations are definitely in the short to medium term. I mean, not much more to add here. They just reported earnings recently. And when the largest employer says they're overstaffed, I think people take extrapolation more to the entire economy with Walmart, maybe more than any other company on the planet for a reason. footprint, physical footprint is mind bending. Logistics are almost impossible to comprehend for someone not smart like me. Yeah, not much more to add here. I don't necessarily think it's crazy cheap. No, I think I would agree with that just because obviously the figures I gave for PE example, it's based on last year's annual sales and earnings. So it definitely will look different this year. So that's something to keep an eye on. Most likely that PE will be much higher because the earnings part will be much lower. Extremely durable in a recession. That's all.

Yeah. And I think it's definitely, I would not fault anyone with seeing this as a good opportunity, especially for a portfolio that's a bit more dividend focused. 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. and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom

Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. Home Depot here, the market cap is 300 billion. I actually, you know, I thought the market cap would be a bit lower compared to Walmart, but I mean, it's a good business. I can't fault the overall market for liking this one. Sales of $151 billion. Again, just looking at the latest full year result, five years average revenue growth,

9.3%. So that's very good for a company as large as Home Depot. Gross margins of 33.6%. Again, much higher than Walmart here. Net income, $16.4 billion free cash flow 14 billion return on invested capital 38 percent and they're currently trading at around 18 p 20 times free cash flow last year last five years the p has ranged between 14 and 35 so definitely on the lower end dividend yield of 2.65 percent and they have grown their

dividends 17 on average over the last five years this one i already have a small position in my portfolio so it's really obviously i like this company they reported pretty good results especially compared to walmart and target i do understand that it's not the exact same of retailer, but they do have certain areas that does overlap with a Walmart, for example, but they are not immune to margin pressures like any other retailer. And one tailwind, like I mentioned on the latest earnings result is the rising rates environment for them. If people decide to stick with their older home and renovate instead of getting a new home, it could be very good for Home Depot. Look at these numbers compared to Walmart. It makes Home Depot feel even cheaper to me. Dude, this is such a good company. There's so

many things at play here that describe their competitive advantages that we could go on and on for. The growth that they have seen, I don't see obviously persisting, but I do think that it is a net-net benefit for people looking to do these kinds of home improvement projects. It got a little too expensive. I think this correction makes sense. Yeah, it's definitely one that i would consider owning i know the guys who are working for me are are really like getting long it currently as we speak so there's some smart people here so that's all i'll say yeah and it's it's and like i said i own it it's a small position we actually started during march of 2020

it's one of the companies I bought during that time. So it's done well. But I mean, I'm not selling anytime soon. If anything, I'll probably be adding to it. Now the next one, Costco, a market cap of $185 billion. And just adding here, obviously, this is just an overview. So don't invest in these businesses just based on this. There's a lot more research required if you're interested in these businesses. And obviously, it's not investment advice, as we always say. But I wanted to, you know, so we don't go on for three hours on this segment, just a bit more of an overview. Sales of $196 billion, five years average revenue growth of 16.6%. Gross margins are much lower here and I know we'll explain why 12.7%. The main reason is that Costco gets most of its net earnings and free cash flow

not from the sale of merchandise but from that membership model that they have. So that's why it's a bit misleading looking at the gross margins here. Net income of $5 billion. Free cash flow $5.3 billion. Free cash flow has actually been trending up pretty consistently over the past five years. Return on invested capital 20%. They're currently trading at around 37 PE and 35 times free cash flow. Last five years, the PE has ranged between 25 and 51. So kind of the median or the average right here. The dividend yield of 0.86%. So I think it's the lowest after Dollarama, just going on memory here, has grown 12% on average for the dividend over the past five years. This for me is a very intriguing one, definitely because of the model. I think it's pretty resilient in terms of model having a membership model. We did talk about Costco. I think it was late last year, early this year,

and I had looked at what happened the year after they actually raised membership prices to see if their membership retention had gone down. And I don't know if you remember, it did not budge. It was always in the low 90s in terms of membership renewal, which is extremely good. There is some more growth, I think, in store for Costco, mainly because of where their stores are located. So a lot of people may not realize that Canada is actually their second largest retail presence after the US. There's 105 stores in Canada. And for context, there's two in China. So I think there's definitely some growth potential in China just based on that.

Obviously, there's the whole regulatory environment there that we won't blab about again. there's the whole regulatory environment there that we won't blab about again. But people have been from what I've read, Chinese consumers have been raving about Costco. They have and the lineups to get in there are insane. And they hit saturation that you could expect a warehouse to hit a location to hit in like four years in four months. And so there is crazy hot demand for it. I got some metrics here because we do cover Costco. So we have these kind of like specific metrics that you won't find just in a regular income statement, which is since 2014, cardholders has gone from 76.4 million to 114.8 million in the second quarter of 2022. These are all updated for this latest quarter.

Warehouses worldwide have gone from 608 to 828. And so they consistently build low single digits a year in terms of warehouses. And it's a really easy playbook for growth. in terms of warehouses. And it's a really easy playbook for growth. Not to mention, there's this kind of double whammy where gross profit and operating profit per location is through the roof. It used to be 4.9 million operating profit per location. That has ballooned to 9.1. In terms of profit per average membership from 2015, it was 192. Now it's 238. This is what I mean by operational excellence. Not only are they continuing their growth playbook of just opening more locations, providing tons of value and providing the Costco flywheel,

which is an important thing to understand about the business. But each location, they optimize every single month. That's why on their investor relations website, they actually report sales every single month online, not just every quarter. So it's one you can follow every single month and see the KPIs that matter. And so yeah, the flywheel is more memberships, more bargaining power with their suppliers gives them cheaper prices, which attracts more members. More members attract better bargaining prices, attracting cheaper prices, attracting more members. And around and around it goes. This is one of the best models in retail by far.

Yeah. And if you're a supplier, at the end of the day is, yeah, you're probably not making as much on each product that you sell to Costco. But the volume that you get is really tremendous. That's right. Now, the next name, obviously, I went by market cap. So the last two names are the Canadian focus companies. The first one, Canadian Tire, the ticker for Canadian Tire is CTC. I believe they have a regular class and a class A share. And I had to include, obviously, some Canadian names because we're the Canadian Investor Podcast.

Canadian Tire, I thought for whatever reason, had a bigger market cap than that. So it's $10 billion in market cap. They had sales of $16.3 billion. Five-year average revenue growth of 4.4%, which is actually, I'll hand it to them, for a company that's only in Canada, 4.4% is actually not too bad. What are your thoughts on that? Yeah, that's much higher than I was expecting, to be honest. That's solid. Yeah, exactly. Just because obviously they're not. I don't know if they're looking at expansion outside of Canada, but I don't think so. And the gross margins here are 36%, so still pretty solid

for a retailer. Net income of $1.1 billion, free cash flow of 1 billion, return on invested capital of 10%. And they're currently trading at around 10 PE and 10 times free cash flow. Obviously, last five years, their PE has been between 5 and 18. So it's kind of in the middle range, maybe on the lower end here but clearly the metrics i think this is actually a good example if we compare it to some of the other names where you know there are oftentimes premiums put on certain type of businesses and canadian tire is definitely on the opposite side of that so you may see this as 10p being a great bargain but then when you put things into context i'm not saying it's expensive but you know it's it's in the range for a company like canadian tire

and then their dividend yield of four percent i did factor in the recent 25 increase in dividend and it has grown on average over 20 over the last. So clearly, if you're an owner of Canadian Tire or you're interested in the name, you're definitely banking on that dividend increase because it's going to provide you with a substantial amount of your total returns on here. And, you know, sales have been growing at a decent clip. Very impressive since, like i mentioned walmart and home depot had lower sales growth and given that you can make a case that their market is probably fairly saturated for canadian tire it's not bad and they even saw here their retail gross margin increased to 12.1 percent they had recently and they had about eight percent online, which is double their pre-pandemic

level. So they did see an increase in online sales, and they're still higher than the pre-pandemic level. So it's not bad considering that their online experience, we had talked about that at the beginning of the pandemic, was not the best. I look at this name and spoiler alert for your next name and I have the exact same thesis, which is, yeah, it's a good Canadian business and that's it. It is in return money to shareholders mode right now, clearly. You see the capital allocation strategy going to pay a healthy yield, a safe, somewhat safe yield. It's growing really fast. And so if you're looking for income, perhaps this is the name. Is it moat or maybe doesn't have one? I don't know what it is. Durable here in Canada for the next couple of decades? I'd say probably, yeah. I mean, I think so for sure. It's just the fact that that's the thesis, right? You're pretty much stopped right then and there. You're not expecting them to build some locations outside of here with any real degree of success. And if that happens and I'm wrong, yeah that is wonderful that's a great story i just

don't see that happening yeah no i totally true and i did skip a name because dollarama is actually should have been the fourth on the lid as has a 20 billion uh market that's twice the size of twice the size is canadian tire i don't know I did. I kind of was scrolling down and I just, because I was looking at Canadian Tire and like, oh my God, did we delete my whole portion on Dollarama? Now Dollarama, like I said, market cap 20 billion, sales 4.3 billion, five years average revenue growth of 7.3%, which is very solid here. Gross margins of 43.9%. Again, very solid, especially for a low-cost retailer like Dollarama. Net income of $663 million. Free cash flow of $900 million.

Return on invested capital very high at 20%. And they're currently trading at around 30 PE and 22 times free cash flow. The last five years, it's traded between 19 and 45 for the PE. So again, kind of midway, I would say, of that range. Very small dividends. It's yielding 0.3% and has grown on average 8% over the last five years. So this one has always kind of traded a bit at a premium. I know they do definitely, they have a growth strategy based on opening new stores,

but they have been increasing their same store sales at a decent clip as well, going on memory here when we did the earnings release. It has faster growth in sale than Costco and Canadian Tire, like I mentioned. when we did the earnings release it has faster growth in sale than costco and canadian tire like i mentioned and if you're looking at in terms of growth it's definitely an interesting play here i think the biggest question where we disagree a little bit it's just their pricing power i don't know with the recent results that we've seen from Walmart and Target, for example, and the margin contraction

that we've seen from both of these names, if it'll hit a name like a Dollarama, especially seeing that some of the supply chain issues and lockdown that China has been imposing. I know a lot of their merchandise comes from there. So I think there's a lot of question marks personally around them for the near term, whether they'll kind of exceed expectation, they might, and I'll be happy to see them if they do, but definitely some questions mark for me there. Yeah, I think I've been pretty vocal that I do trust their ability to flex pricing power. I mean, you might see it in the short term with some of those cost pressures

these other retailers have seen. You might see that come out with a quarter or two before they're able to actually change prices and get them in effect. So that's entirely possible. I would love to own this stock if they had a presence outside of this country because they are literally, in my opinion, the best run dollar store in North America. And there's a lot of good ones in the US. And I think DollarM is the best one of all of them. The problem is you basically run out of people to sell shitty $4 items to. Yeah. You run out of people to sell junk to. Yeah, exactly. And the market in the US,

right, there's definitely more competition. So I don't know how well they would fare where they definitely consolidated a lot of the competition that was in Canada. I remember just thinking back 15, 20 years ago, there was a lot more of these independent dollar stores or small chains. years ago, there was a lot more of these independent dollar stores or small chains. And now they've almost all become Dollaramas. That's right. Yeah. And that's what the US looks like today is what Canada looked like before Dollarama became basically the monopoly on dollar stores in the country.

Yeah. I guess in the US, there's just like, what, four or five big players. Yeah. There's a bunch of big players and small mom and pops all over the place. What is it? Dollar General, Dollar Tree. Yeah, five under, five below. Yeah, that's it.

Yeah. There's a bunch of them. All right. Does that wrap it up? Yeah, that's it. You have $10,000 to put in one of them. What do you do? What are you doing?

Wow, that's a good question. Today? Yeah, today. May 25th. I think if I were, the two names would be Home Depot and Costco. If I were to pick one of the two, I think I would go with Home Depot just because the valuation is a bit more attractive for me. I mean, I would still, I don't know, Costco has the growth, but Home Depot, the valuation, slightly higher dividend, I think tips the scale for me. But yeah, I think I would be happy with owning either of them.

I'm totally aligned with you there. If I can't do anything and I have to hold them for super long time duration, I'm owning Costco and that's probably the one I should pick, but I don't like Costco here with fresh capital compared to Home Depot. I think my answer is identical to yours. Fresh capital I'm putting in there, but like you, I think I'd like to split it into both. I don't love the price of Costco here today. I do love the business though. the price of Costco here today. I do love the business though. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual

RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY do-it-yourself investors blossom is an essential app for you it has been blowing up with now more than 50,000 Canadians plus and growing who are using the app every time I go on there I am shocked the engagement is amazing this is a really vibrant community that they're building and people share their portfolios, their trades,

their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo-style education lessons that are completely free.

You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you, go on there and follow me. Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. All right. Let's move on to our last segment before we round out today with stocks on our watch list with a overview. It's not like a deep dive. I'm not going to go into all of the accounting because it's just so boring for a podcast. It's important, but

yeah, we'll just do an overview. We're going to talk about stock-based compensation. It's been top of mind for a lot of investors lately. What is that? The corporate finance institution defines stock-based compensation as a way of paying employees, executives, and directors of a company with equity in the business. It is typically used to motivate employees beyond their regular cash-based compensation of salary and or bonus and to align their interests with those of the company's shareholders. Shares issued to employees are usually subject to a vesting period before they are earned and then can be sold. Okay, so let's break that down into Brado's spark notes, which is a company issues stock options or restricted shares. They're called like RSEUs very typically. And there's a vesting period. Okay, four years is really quite common and become the norm for tech, at least from my experience. And startups, that's typically the four-year vesting period.

And what I usually see is, and what I'll be doing for early employees at Stratosphere is what is called the cliff. So a cliff is the employee shares will not vest at all until they hit 12 months so they can't just join on get a bunch of their stock-based compensation like a bunch of shares in the company and then like just leave like jump ship so they have to be there for 12 months now after the cliff that 12-month period you'll have like a regular schedule monthly is pretty common for companies after the cliff they get their equity issued in a regular schedule. Monthly is pretty common for companies after the cliff. They get their equity issued in a regular schedule. Now, for public companies, the employees can then do whatever they wish with the shares. They can sell it on the open market if they'd like. For private, it's a little bit more difficult. For a private company, you basically need a

liquidity event, some buyback program, secondary offering where outside investors can buy shares from employees or insiders holding shares. I'm not an expert in this by any means on how this works yet. I'm still early in my entrepreneurial journey, but I've seen multiple variations of liquidity events to give private company employees an ability to do something with their shares. Okay. So why issue SBC or stock-based compensation, SBC for short form? Why is it good? Why is it a good idea? Why do companies issue SBC? So it incentivizes employees to think like owners versus employees, right? It helps solve some of that like principal agent problem. And it doesn't actually require actual cash outlays to do this compensation. And this is probably one of the biggest ones for

early stage companies, which is you can compensate and incentivize employees, which you need to do both of those things in those early stages really well without having to dish out huge cash outlays. That precious cash you desperately need when you need to keep growing fast and you might not be that profitable in that stage. And a lot of these big companies still aren't, still looking for that never-ending path to operating leverage. And so this is why stock-based compensation has become so prevalent in a lot of these high growth sectors, it's become almost now problematic from a lot of views of investors. I'm going to get into why it is problematic and just like from a bird's eye view, but any quick comments here from you on

SBC, when you think it's a good idea, when you think it's a bad idea and that kind of thing. Yeah. I mean, obviously I think overall SBC for me is you have to, it's a fine line between overdoing it and doing it just enough. I think for the most part, I think it's an easy equation. If you simplify it is you just have to make sure that you're creating more shareholder value overall than you're issuing or diluting shares. I think that's the simplest equation. Now, to what level is that threshold? Do you need to at least create 10% more value or whatnot? I guess that will depend on each business and each investor. But that's

the basic of it all is you want the company to create more value than it is diluting shares. But again, like we've seen with some growth names, yeah, I mean, you can dilute quite a bit and then, you know, everything's going on until it isn't. And then you're left with like a Teladoc, for example, where they almost doubled their share count because it wasn't. And then you're left with like a Teladoc, for example, where they almost doubled their share count because it wasn't just stock-based compensation. It was the Libongo acquisition. But that's an example as well, where there's twice the amount of shares that there were just a couple of years ago. The business might still be very good, but there's still a lot of work to be done to create value for shareholders a lot more

because of that share dilution. Simon, I think that what you have just explained is wonderful because what you're describing is there has to be some net value creation. Yeah, let's double click on that for a second. There has to be some net value creation between the company compounding the intrinsic value of the shares faster than they're diluting existing shareholders. And in some cases, I just don't know if that can be true. We can find lots of examples of where that is and when it is not true. It can be bad for investors in many ways. But generally, investors want what is good for the company. As a rule of thumb, there's of course a million, nothing is, there's always nuance to life, but shareholders should be handsomely rewarded if the company

does well. And so you want investors, want the management team to do what is good for the company. And it can be good for the company to compensate employees with stock-based compensation for the reasons why I mentioned that it can be a good idea. And lots of companies do it, but just like anything, too much of a good thing can really backfire. And it got a little bit too trendy and it dilutes shareholders in cases like quite a bit in some cases, like the example you just mentioned. Ultimately, what drives value creation for common shareholders? It's, in my opinion, if I had to put one metric to it, it's free cash flow per share. If a company can increase free cash flow or buy back stock or ideally do both, free cash flow goes up in a major way over time per share. Now, a stock under a lot of pressure

right now, Snapchat, ticker Snap, has gone from about 1 billion in outstanding shares five years ago to 1.55 billion in outstanding shares. So this represents a share count increase of about 53% since 2016. This is creating an uphill battle for existing shareholders. There has to be some net arbitrage that value creation is compounding faster than shares are diluting. And I think that you described that and put that really eloquently and simplified it for us. And I think that now the tide is starting to come in on this stuff, right? Like stuff goes in and out of favor. This is starting to go out of favor in terms of what the market's punishing. Yeah, I think a correction in this trend probably makes a lot of sense. Yeah. And I love that you said per share. So there's a lot of limitation with per

share prices, whether it's price, earnings per share, free cash flow per share, there's a lot of limitation with per share prices whether it's price you know earnings per share free cash flow per share but it's very useful when you want to look at stock dilution but again you have to take things in context because you also want to be careful by looking at the earnings per share for a company that you might think is growing but it's not they're just buying back stock so that's something something you always have to take, you know, that's investing, right? There's, it's never black and white. It's always kind of gray. You just have to make sense of what they're putting out there. And the one thing I would not want to be is a company heavily diluting share, but then buying back shares at the same time. And I know there's company that have done

that. That's like the worst. Yeah. I think, well, I mean, almost all of big tech does that. Yeah. Which is, yeah. I'm not a fan of that. When they do that too heavily. Strange. Yeah, exactly. So, that's something I think for people just to keep an eye on. Yeah. And so, if you want to track the actual shares outstanding number, And so if you want to track the actual shares outstanding number, we have it updated for every single North American listing, every single quarter. If you're on a paid plan on Stratosphere, that is one of the premium metrics, which is shares outstanding.

And so you can get that at stratosphereinvesting.com. Okay, Simon, let's do what's on our watch list presented by our sponsors at EQ Bank. If you're looking for a savings account that's going to give you much better rates than what's out there and the simplicity of their platform, it's just so easy. Head to eqbank.ca forward slash TCI. Make sure you use that because it really helps us get some recognition as eqbank.ca forward slash TCI. Simonone you're up first yeah so the name it's a name i we talked about the earnings uh i talked about it during the earnings released last week so it's canada goose i've been talking about it for quite some time but they seem to be executing so well you know i'm trying to find

something i don't like about the business and it's really hard. I know it's a retailer, but they've clearly demonstrated that they have great pricing power. It's a small cap. So I think as a retail investor, we have an advantage here. It's a name that some of the larger funds probably don't have on the radar because it would just be too big of a portion into the company. They're increasing their margins in an environment where most companies are seeing margin contractions and pretty drastic margin contraction for a lot of companies as well because of inflation, obviously. 65% plus direct-to-consumer sales, solid guidance for 2022 as a refresher. They're guiding between 18% and 27% in increase in sales.

And contrary to a lot of stocks and goes in well with what we just talked about for stock-based compensation, their share count has decreased year over year. It has increased a bit in some years, but has stayed pretty stable over the past four or five years. When you look at their total outstanding shares, it's increased a little bit, but then decreased. So I think they've done a pretty good job at keeping that in check. I have it right here. I just typed in Canada Goose on Stratosphere. In 2014, it was 108 million shares and it's at 109 now so basically completely flat on the outstanding so that's actually pretty great right because you're seeing that company you're you're still holding that same pie same same piece of the

the pizza or pie let's not go back into into that analogy because we're going to confuse everyone. So it is trading at two times this year's sales. So pretty reasonable for a growth company. And they generated just shy of $120 million in free cash flow in their latest full year results, which means they are trading at around 20 times free cash flow. I think that's pretty reasonable for a company that's growing this fast. Lots of stuff to like. It's a Canadian name and I think they still have a lot of growth ahead. I'm very curious. I'm just checking out Aritzia to see because we're talking about share-based compensation. Aritzia has been okay, reasonable. It's gone from 106 to 115 in that same time horizon. But again, nothing crazy. Nothing crazy, no crazy dilution. Another small cap, probably not very well known.

I mean, this is – Aritzia is almost $4 billion in market cap on a 40% drawdown. Again, two clothing stocks, right? We're talking about clothing stocks that are performing quite well, have wonderful DTC. And I feel like a broken record talking about, you won't catch me owning one of these names, but they sure are interesting. But the brand recognition, I think personally, is much greater for Canada Goose than Aritzia. Like, I don't think it's even close. I think the only downside is it's a more seasonal business.

More seasonal? God, I hope my girlfriend doesn't listen to this podcast and she heard what you just said. She'd have some words for you. Yeah, I mean, I would agree probably on a global scale, especially like with Asia loves these codes. But even, you know, yeah, global scale, but also whoever you ask in demographic, like I'm pretty sure you don't know what it is. Exactly. Don't know what it is. Where it's, yeah, I'm sorry. Like if I. Makes sense, right? Fair enough. Okay. I am going to finish off here. And I was trying to figure out what I did last time because I'm like, I hope I'm not double dipping back to back what's on our watch list. But I don't care

because I'm telling you what I'm buying actually in my own portfolio right now. So I love bear markets. I love these brutal markets when you're a net buyer of stocks because you can buy extremely high quality companies and they're just at better valuations because the whole market is lower. There's no piece of news that's bad for the business. Their latest quarter was solid. And so a lower tide lowers all ships, even the best companies on the planet. No company's immune from this. There's a leak in the bathtub, the water level, all the rubber duckies are going down. And so I just this morning initiated an Orbert's Gambit journal request to convert my CAD to USD shares this morning. And I will be buying S&P Global.

It is something that has sat on my watch list for so long. You're probably surprised I don't even own the shares, although I know. Yeah, I thought you owned it already. Dude, no, like I don't. You talk about it so often. I know. I don't. You talk about it so often.

I know. And I'm like, I'm looking here, like getting my live reaction on the podcast here. I'm just going to look at my portfolio here. And you know what it is, it's because I've owned Moody's for so long. Oh, yeah, that's right. Okay. Yeah. So I've owned Moody's, but not S&P Global. And again, they're basically a duopoly on the credit rating agency.

They each have their own little things on the side and they have these really fast growing soft as a service and data analytics companies as well, which I'm very familiar with. I'm trying to build competitors. And it's unbelievable how entrenched this company has become into the world and into finance. I mean, we talk about the S&P 500. This is the company. It's kind of like how the only thing better than owning the NASDAQ is owning NASDAQ. The only thing better than owning the New York Stock Exchange Index is owning the New York Stock Exchange, like intercontinental, the business. And so I love these picks and shovels type plays.

You know that. And S&P Global is a wonderful business. And so I'm finally picking it up. I'm going to share the journal over. I don't think it's some screaming cheap stock, given the growth. They do grow at like double digits, but the organic growth is not earth shattering. Their latest print revenue is up about 18%, but a lot of that was because of the IHS market contribution to the top line with that acquisition. However, we're talking about a super

high moat company, one of the highest moat businesses probably in the world, extremely durable, high quality, grows fast, has high margins, network effects, competitive advantage at the woo-ha. This has been and this will be shown on my portfolio update on joinTCI.com for this next month here. So go ahead and check that out. That's jointdci.com. You'll be able to see myself and Simon's portfolio monthly updates. And you will see this has been my most active month since March of 2020. I haven't done this many portfolio moves since then. And by that, I mean mostly buying. I moved one thing into another thing, but mostly just net buying. This is the most active month since March of 2020. So, of course, it'll keep dropping now because I've said that.

No, I've been buying a decent amount between stocks and Bitcoin, so for me. But if people want to see how much, they'll have to join TCI. Ooh, teaser. Yeah, teaser here and i'm gonna you know break the news right now the next time we do stocks on our watch list brayden's gonna say it's msci feel like you just need that one now yeah because i'll have the whole trifecta i'm surprised you haven't mentioned it by now, but yeah. Yeah. Well, that's also another great business. The reality is that, you know, I like pairing up these global duopolies.

I call Visa and MasterCard the same position for me. They're a 10% combined position. Oh, yeah. I mean, they're... That's the same company for me. They're the same thesis. I don't have some massively differing thesis between them. I like these global duopolies that have pricing power, tons of durability, network effects, and do business on all corners of the earth. This is pairing up with Moody's Corporation. It'll be a combined about 3% position, both of them combined.

So about one and a half each. So, yep. That's it for this one. That was a good episode, Simon. Yep. Thanks so much for listening. We really appreciate it. If you have not given a rating on your podcast player, if you're on Spotify, if you're on Apple Podcasts, if you're on some other player,

there's some cool players out there, by the way. If you can, give us a rating. It helps the discoverability because the discoverability of podcasts, like if you're podcast startups are hard on the tech side, there's just so many of them and it's really hard to pull it off, I think, in my opinion. But if you have some way to fix the discoverability and sell it to these platforms, my God, you'll have a business because there is nothing for discoverability on podcasts. All I have to lean on is asking you to rate the podcast. And that's all I ask is if you can rate the podcast, leave a review. It means the world to us. Thank you so much for listening.

Check out Stratosphere if you want the data we talked about when CMON's listing. Oh, this is a market cap. Oh, they had sales of this. Oh, it was growth this. Gross margins were this. Free cash flow was that. It's all available on Stratosphere. You just type in the ticker and you have it.

Voila. Thanks for listening take care the canadian investor podcast should not be taken as investment or financial advice brayden and simone may own securities or assets mentioned on this podcast always make sure to do your own research and due diligence before making investment or financial decisions