The Canadian Investor - How We Find and Analyze New Stock Ideas

Episode Date: August 25, 2025

In this episode, Simon and Dan walk through their process for finding strong investment ideas, from using stock screeners to AI tools, and finally doing a full deep dive on company fundamentals. Simon shares the consistent criteria he applies in his screeners, how he narrows down results efficiently, and where AI fits as a research assistant. Dan breaks down the custom screeners he’s built over the years, how he balances dozens of metrics, and why focusing on quality across multiple areas is key. Check out our portfolio by going to Jointci.com Our Website Our New Youtube Channel! Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Asset Allocation ETFs | BMO Global Asset Management Sign up for Fiscal.ai for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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Welcome to the Canadian Investor Podcast. I'm back with Dan Kent. My name is Simon Belanger, if you're new to the podcast. we're doing an episode that we're recording a little bit in advance is going to be a bit more evergreen content but it is something that we have been asked about multiple times in the last six months to a year and it's a really good question for people starting to invest or just getting to know our general framework when we look at companies

so what we'll do is we'll talk about how we find companies so just finding names that we may not know about And then we'll also talk about some of the metrics that we'll look at, the business model, management, and so on. So when we actually analyze a company, some of the things we look at, we may not mention every single thing because it would probably go on for hours and hours. But I think it will still give the listeners, you are listeners, a good idea of how we approach finding a new company and then analyzing it. and also being time efficient. I think that's really important because most people listening are probably not doing this as a full-time gig, obviously.

So being efficient with your time when you have other demands on your time in your everyday life, I think it's really important too. Yeah, it should be a pretty good episode. I think for the most part, our styles are pretty close to the same. So there should be a lot of good commentary here. Obviously, probably a lot of newer people

who don't really know where to start when it comes to screening stocks period when it comes to just analyzing businesses in general probably find a ton of value in this and yeah i've been what how long have i've been doing this for like 18 months now we've never done an episode like this i'm surprised it's finally come yeah i think brayden and i back in the day had done like kind of one on this more on i think important metrics we look at but not necessarily going from a to z in terms of the things we actually look at like finding the company. So let's start off with finding a company using a screener. So I'll start off with the general requirements that I use for a screener now. A little caveat here is just making sure

that you may have different requirements than me. Maybe you're looking for more growth and profitability is not as important for you or maybe you're searching for dividend stock so you'll add in some dividend criteria. But this is the way I typically do it when I try to find names. I'm more an investor of total return, so dividends, I'm fine with dividends. If I like the company, that's completely fine, but it's not something else specifically screen on. Yeah, I mean, I mean, same thing, total return for me. I kind of have a lot of, you know, running stock trades, I ended up kind of building out my own screener, which kind of, like I have, I kind of rank stocks on probably 50 or 60. metrics and then I kind of divide them into like each segment whether it be like valuation outlook

debt growth and then you know from there I kind of isolate out stocks not necessarily on a single metric but like across numerous metrics because I think where a lot of people get stuck up or like kind of stuck as they'll they'll screen for stocks with say low price to earnings ratios which is like one of you know one segment of a very very large story where as it's mostly, you know, you should be screening for, let's say you could have that as your starting point, but I wouldn't necessarily say that should be your finishing point. But I do find a lot of people who, you know, we always want to buy cheap or we all, you know, to a certain extent. So they'll search for stocks that are trading at less than 15x earnings and kind of ignore a lot

of the other solid data you should be using. And it kind of, it doesn't really give you that high quality of a screen. So that's kind of what I'll say. here is, and we'll touch obviously on the metrics that we go over, but don't focus too much on one. Yeah, exactly. So I like to start off pretty vague and then funneled down as I oftentimes will get too many results. So I think that's a really simple and easy approach for people to use. I know you have your 60-point method, but a simple method works very well too. Now, to be fair, you run stock trade, so you do this stuff all the time, probably do more than me. So for me, me, I'll usually start with revenue growth because if a company is now growing, there's not really

any incentive for me to invest in that company. So the starting point I'll usually put as 5%. And then I might tighten up the requirements depending if I get too many names, results that show up with my screening criteria. And then obviously this is just one of them. I'll look at the companies. I want them to be free cash flow positive and have some free cash flow, whether it's on a three or five-year basis, but definitely have some growth, profitable on a net income basis. Again, three to five-year growth on a net income basis. It depends. Sometimes I'll put three.

Sometimes I'll put five. I will probably put a bit more three now just to kind of zero out the COVID years because those can actually skew the results a little bit. Those are the main criteria. It's very simple, as you can see, but I'll usually add some things like I might add some evaluation metrics, like you mentioned, whether it's a price to earnings or price to free cash flow. Usually, if I'm looking at a certain type of business, I might be look a bit more for small cap. So I'll have a range of market cap. Maybe I'll look at $500 million to $5 billion in terms of

market cap. So that will narrow down the results. Maybe I'm looking a bit more Canadian market than I'll exclude everything else but Canadian stocks or vice versa for the U.S. there's different things you can put if I'm looking for a sector specific I'll add the sector to or you can exclude some sectors if you're using screener some people may not want any commodity related stocks in Canada for example so you could exclude some of those sectors so this is usually how I'll do it and then it's pretty often that I'll get 25 30 results because the criteria like I said I'm going from a broader range and then I'm I want to narrow it down. And if that's the case, then I'll tighten up the search criteria, or I may add some additional one. So in terms of tighten up, I could say, well, you know what, instead of 5% revenue growth, let's put 10%.

Or free cash flow growth, I wanted to be in the last three years, an average of, maybe I put an average of 3%. Now I'll say, you know what, let's put 7%. So as you tighten up those criteria and make them more stringent, you'll end up with lesser and lesser result. And usually I will, I'll try to get it down to 10 to 15 names because more than that, you just, it's just too much. If you narrow it down, then you can speed, speed up the rest of the process. Yeah, I just want to clarify, I don't actually screen over 60 metrics. That would be absolutely insane. But I took the time to build out kind of a system that does it, which kind of

makes it so it's very easy to to kind of go in that regard that would be that would be a lot of because when you said that I guess I misunderstood because I'm like oh man you're you're going to scare a lot of people there yeah so I'll have like kind of on the back end I have like 15 or 20 valuation metrics that are are graded but then the end result is one kind of valuation over yeah so I kind of built that out which makes life a bit easier and a little bit more in depth but if I like for a screen like I pretty much look for the the initial screening is pretty much double digit earnings growth free cash flow growth and revenue growth but the one thing I think where some people get into trouble is is kind of looking at this on a yearly basis so I'll instead

kind of span it out over a period of five years 10 years etc because I mean if you do it one year you might end up missing out on a bunch of high-quality companies that might have had a rough year, whereas if you're looking back to five-year historical averages or 10-year historical averages, like you could have a company that has grown free cash flow at a 10% pace for the last nine years, but they ran into some issues the last year, maybe that are even completely out of their control. And you'll miss that in an initial screen if you're just looking for, you know, trailing 12-month earnings growth free cash flow with things like that's a good point that's why yeah i i like the five-year sweet spot because i always get reluctant adding like too much historical data because then it's not necessarily

reflective of the current business but the reason i said three two is more but notice i did not say one the reason i said three is because of those covid years would still be included in the five year and i know that will skew the result so that's why the three it still gives me a decent average and it's where things air quote are back to normal a little bit but once I get the results usually what I'll do is I'll use AI to help me out and speed things up so because the screeners they don't tell you really what the company does aside from the sector like they won't tell you it will just give you the names of the companies and then probably just the information based on the criteria you put so it'll give probably the market cap if you put the market cap as a criteria

revenue growth and all that stuff so what i'll do is i'll just get the companies and get a i to give me a quick description of what the company is what is business is and just to get a sense and i find doing that will usually weed out like another probably let's have 15 i'll probably weed out like five to 10 companies because then there's probably going to be some companies that just by seeing the business model i just kind of write them off i don't want to to look at it further. Obviously, here, AI is a tool. It does make mistakes. But to give overview on a business model, that stuff, it'll, I think it's pretty reliable to give you a general idea. Like, don't be super precise because that's when you'll get into trouble. But just to

get a general idea, and it's always that, right? Like, people are probably listening. I think you're seeing a pattern is just going from a starting point that's pretty vague, pretty wide, and then narrow things down while being as efficient as possible with your time. Yeah, and I think in regards to AI, like I'm using it more and more now, like way more than I did when it, when it first came out. But I think the way you use it is key. Like you said, it's kind of a tool and assistant at, you know, that's probably be the absolute maximum I would go. I mean, like I'll utilize it to say, I'll pull earnings reports and conference calls. And it'll kind of pull data out. that used to take me an hour to get in like a span of two or three minutes.

But I kind of find it's it tends to be biased towards kind of what you want to hear. That's kind of what I've found overusing it. So I mean, if you're actually using it to say confirm the strength of a company or say confirm a thesis, I mean, it tends to lean more to agreeing with you. I mean, maybe I'm just, you know, that's anecdotal, I guess. shown it's been shown to do a bit more of that unless you ask it oftentimes i'll be like no no bs no fluff give me the the fact straight up and i like that i think it's it's pretty good but no you're right i think it tends to be a bit biased towards what the it thinks you want to hear like if you if you think a company is a buy on you know like say you think stock a is a good buy because of x y z even though

X, Y, Z might be completely inaccurate. I feel like if you enter that into GPT, it's going to find a way to kind of confirm that for you, regardless, unless it's just absolutely outrageous, obviously. So I find I wouldn't be utilizing it for that, but if you're doing it for like mundane tasks, like you said, company overviews, there's no reason for you to,

if you have a screen of 15 companies, there's no reason for you to have to go to every single investor relations page anymore. I mean, plug it into GPT, and it'll tell you what the company does in very short order, but I wouldn't be doing it for much more than, like I said, very basic tasks.

I think you'll probably mention that situation when we went over waste connections and waste management, I imagine. Yeah, waste management. And you'll see what I mean. Yeah, well, I think, did I mention when we record it? Because recording this after, but just a quick recap is I asked Chad GPT to know what countries of operation waste management wasn't. And it gave me U.S. Northern America.

basically U.S. and Canada, but I had the investor relations page open and I was validating the information and the most recent annual presentation for shareholders. So it was at the end, I guess early 2025, which would have been at the end of last year, which I think they followed the calendar year. And I saw that they had a bunch of operations like in Europe as well. So I kind of looked where it got its sources and then it got a source from 2004 and that's how it got the fact that it only had operations in North America which is just shows that it has its limitation because the document was clearly 2004 and if it just did a little more research or searched the web it would have known that waste management was still in operation and would likely have more up-to-date

information maybe they would still be operating just in North America but But that's just an example. But speaking of AI, it is useful to find ideas as well. So you can use AI to get a list of companies. I think it's a great tool for that. Again, emphasis on the tool. It's possible at like for one thing I really like for AI is if you're looking at a sec, like a trend or something you want to target. Because sectors and industries are fine, but they may not be necessarily reflective of a trend.

trend that you want to actually look for. I mean, we talked about it time and time again for the SMP 500. Google is in the communications sector. And I think Microsoft is in tech. Well, I mean, there's a lot of overlap between Google and Microsoft. And I understand that there's YouTube and all that stuff. But if you're looking for AI plays, like you can make a really strong case that Google and Microsoft are some like not pure plays, but some very strong AI. plays if you believe in the continued adoption and those LLM models and businesses integrating that through the Microsoft Suite and G Suite and so on, well, they're still in different sectors. So that's just to show that if you want to get a trend that I think it's really useful to give

you some idea. Again, it would just be a starting point and just to get some ideas of potential companies that would be some to come ideas to look into more to find those trends yeah and it's probably somebody doing a simple screen for say they want AI companies they're probably going to isolate it out by the tech sector they're probably not even going to look in the communication sector which could easily have you missing out on a company like Google yeah it's it's great in regards to that like for sourcing like basic information like that and I also find when you when you actually give it a document or a piece of text to actually look over it's generally very good at

that where it gets into difficulties and kind of makes mistakes sometimes is when it actually has to go out and source the information itself then sometimes it finds you know a lot of stuff well like you said it pulled in our it pulled data from from 21 years ago so whereas if you were to have on the flip side if you were to have given GPT that 2025 document and said where are their operations, it would have come up with Europe. It would have actually found that data and spit it out. Yeah, it's a useful tool, but you got to be able to use it, right? Exactly. In this kind of market, I like having some cash on the sidelines. It gives me the flexibility to jump on opportunities when the right stock goes on sale. But just because the cash is waiting, it doesn't

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So I think that's important because a lot of the time, and I think sometimes I'm a little bit guilty of that too, is we tend to navigate a bit more about companies that we heard of or familiar with, but there's thousands of companies out there and some that you likely have never heard of. And if you learned about the business and what they do, you might find them very attractive businesses to invest in. It could be finding an article that provides like a deepish dive on a company or even a news article or something that they're talking about this company. You're like, oh, you know what? Like, what do they do? Like, let's get a bit into like research mode and have a look. Maybe it's a good investment. I know there's stock sites that provide picks like stocktrades.ca that where you'll

do the research and then show the research in terms of stock picks. You can listen to podcasts. where they'll talk about companies that you haven't heard before. Like, there's a lot of different ways to find ideas. It's not just screeners, but I think it's important to let people know that there's a lot of different ways to find them. But regardless, even if you hear it on the podcast and you heard Dan and I talk about waste connection, waste management, still, you should still be doing your own research for it.

It's just a starting point. even if we try to do a somewhat deep dive and some companies will talk about or you find some research, it's really important that you still do your own research and validate that information. So that's what I wanted to put emphasis on here. Yeah, I would say this is the easiest part of the process. Like, by far. It seems like overwhelming, but it's really like with screeners now with how advanced they are, like it doesn't really take all that long. to get a short list of five to ten names, whereas before, I mean, screeners have been around before, but for a long time, sorry, but before it would have taken quite a bit to kind of trim it down

to five or ten companies, say, but then after you get through this process is kind of where the real work starts and a bit more complex. But like you said, I mean, you can't just be buying companies based on the ticker. Like if you're screening companies and it seems too good, but they're cheap they have a whole bunch of promising metrics things like that i mean there's a lot of underlying research you have to do because ultimately you are buying a business like it is an actual business in the real world and i think that's where kind of the deep work comes in is when you're actually diving into the companies themselves not screening for them yeah exactly so that first part finding ideas finding companies it it's not that long right like there's

different tools that are available. And like I said, using AI to be able to get a summary of the companies when you have those ideas, I think already with that, you can narrow it down what you've found pretty rapidly. And I think to me, that's an important point. Some people may have a lot more time. They might be retired and have 25, 30 hours a week to be able to dedicate to that. That's fine. Maybe you can be a bit less efficient. That's okay. But I try to be as efficient as possible. And that's why tools like and fiscal.a.I. formerly finchat.io, that's why those tools are so useful because if I start looking at revenues and I'm past the stage of finding a company, I found an idea that looks promising at first glance, then you can really get

all the financial information in one spot and be really efficient with your time. And probably within like 30 minutes, not even, you can decide whether you want to keep digging further in this company or you know what? I use a screener. It passed the screeners that I use, but looking into it more into depth, it could be that they're just diluting chair at a crazy rate and that's not something I want. So I'm just going to pass on that company. But having that platform, I find it very useful. If you don't have it, that's fine. You can use investor relations. You'll be able to all the information data is pulled from financial statements. It's just going to take you a lot more time.

So there is a lot of time savings available with these kind of platforms. Now, looking, once I have, I'm there, I start looking at financials. So the first thing I'll check is make sure that sales are pretty consistently rising, of course. The caveat that the COVID 2020, 2021, there may have been some sales figures that were skewed one way or another because of the lockdowns and everything we saw with COVID. But this is just validating essentially the information that I got from the screener or other sources like AI or news articles, whatever it is. I'll check if they're consistently profitable on a net income and free cash flow basis. If they're not, then and there's not a good reason, I'm going to be done

with a company. Like for me, profitability is very important for other people. It might not be. And I think that's important to mention here I'll check the market cap to get an idea of the size of the company and all these metrics here I tend to also the further down I am and the more granular I get into the metrics the more I'll be checking and comparing with peers throughout the process I think that's important for example market cap we go back to waste management and waste connection well that's important right like I would see that you know what waste connection is the smaller company of the two so that gives me a pretty good idea that they're probably not the market leaders there like without knowing anything else from the company so just this kind of information i'll check the margins

i really want to see the trend of margins like obviously margins will be lumpy a little bit it's rarely going to be super consistent but you want to see the trend maybe over two three four five years are the margins going up staying stable going down that's something i want to see return on invested capital. I think that's really important to see how efficiently management is investing capital. The amount of cash on the balance sheet is something I always checked, the amount of debt on the balance sheet. And for debt, if I'm at this point, I'm like far enough into reviewing this company that I get to the debt. I will get into the financial statements that I'll usually go to the investor relations page and I'll start checking how the type of debt they have.

Is it variable? Is it fixed? How it's structured? The maturity and also check the interest payments, but specifically for the interest payments, I'll use my favorite ratio for that or metric is looking at EBITA compared to interest payments. So how many times essentially their profits cover interest payments? Profits before interest. There's other, it's before other things as well, but that's a good, good ratio for me to look at. And of course, when you get into these kind of ratio, want to compare with industry payers too now before i keep going do you want to add anything there yeah i have a bit here the one thing i was like the debt to so the ebita to interest like they most of the times you'll see that listed as the interest coverage ratio it's effectively the same

thing so it's yeah it won't say like ebita to interest it'll just be interest coverage ratio it'll typically be like a multiplier like a a 5x would be the fact that they generate 5x the EBITA to cover their interest costs. So the one thing I'll say is return on invested capital. This is obviously a very, I would argue it's one of the more important investing metrics. It's effectively judging how well the company is using the money that investors give them, whether it's debt or equity to generate returns. But the one thing is returns on invested capital like in isolation are not really,

they're not a useful number. you need to compare it to the weighted average, the cost of capital effectively. So they call it the whack, the WACC. So this pretty much tells you what they're creating over and above what it costs to get that capital. So like in the simplest way possible, if you have a company with a 10% return on invested capital, that's generally pretty good on the surface. But if the cost of capital for the company is 12%, if it costs them, if they're the expected returns from their.

equity and the interest on their debt is 12%. It's actually destroying value. It's not adding even at a 10% ROIC. So it's very easy to look up the weighted average cost of capital for a company. Like there's a ton of website. It's actually very complex to calculate it yourself. But if you were to just Google it, like you could Google the Apple WACC and it'll generally give you a number 9%.

So obviously, you know, if Apple's return on invest in capital, I think they're like 30%. If their weighted average cost of capital is nine, they're creating a ton of value there. But I think that's important that you compare these two metrics against each other because the returns on invested capital in itself are not. They're a good metric, but they're not,

they have to be compared against the cost of that money. No, that's a really good point. Anything else to add there? No, I get that. The one thing I will say is, as you mentioned, like check these against peers like especially like operating margins you know you might have a company that has five or six competitors and they might have really good operating margins but

they might have the worst ones out of the bunch so yeah exactly it's very good to compare this yeah because don't start comparing walmart's operating margins with lulu lemon is going to be very different yeah Walmart is basically scale and low margins where lulu lemon is a bit more premium not as much scale and higher margins are obviously completely different companies but i'm just trying to use that where it's you can't really take one number and look at another company that's pretty different and just say oh well do lemons way better than walmart i would say walmart's probably that more resilient company of the two and can be good in all different kind of approaches but i wanted to and that's good that you said that again because i think that is

something we get asked a lot. I get asked a lot about that. Like people are like what kind of P.E should be, should I be looking for like what kind of, you know, dividend yield? Like all these questions that they're looking for like specific numbers. And that's the thing about investing. Like it's very rarely black and white. It's often gray. And to get a good idea whether the gray makes sense or off for the company you're looking at you have to put it into context and the best way to do that oftentimes is first compare it with itself historically and second compare it with peers and how they're doing and with those numbers yeah you like you have to like you had mentioned you can't take a loblaws operating margin and compare it to apple and like obviously apple could be the

stronger company but they're two very different businesses one is like a pure volume gross sure whereas the other one is kind of a higher margin technology company like I think whether it be actually any valuation metric first off you should compare it probably to make your life a little bit easier just compare it to historical averages instead of coming to an absolute number like if a particular company trades at 20x earnings and you look to the last five or 10 years and typically the company is traded at you know 23 24x earnings like generally the market is is pretty efficient as valuing companies based on if if the market has paid for the last 10 years 25x earnings for the company and it's now trading at 20 it might be a little bit of an indication of value obviously

something could have happened to the business that causes that valuation to go down which is why like the metrics are are kind of just a fraction of the whole story but in terms of peers as well like you're you're not going to find you know the grocers will trade at lower valuations than say technology companies. So the better picture of valuation is to compare the grocers against each other. Yeah, yeah, exactly. So I just wanted to mention that because I think there's this desire oftentimes to like know like, oh, you know, especially if you're for a lot of people wants like certainty

and oh, it should be this number. Well, it's not it's not that easy. So of course it is more of a general approach. I think the approach of the things that we just mentioned. applies to most companies that you'll look at, but there are always exceptions. And investing is no exception to that. And I'm thinking here about certain types of company. And I know you'll know which one I'm talking about. But for example, if you're looking at the bank, don't start looking at the free cash flow. Yeah. Like it will not, it will not make sense. And if you're looking,

you'll want to look at other things like provision for credit losses, interest margins, loan originations and all these different things that are specific to banks. If you're looking at a real estate investment trust, well, don't start looking at net income. Like, it will not make any sense and it'll just be completely out of whack. You'll want to be looking at things like funds from operation, adjusted funds from operation, occupancy rates, things like that. These are the things you'll want to look at for REITs. And these are just a few metrics for each, but I just want to show that the metrics that I mentioned for banks and REITs will not apply to Apple, for example. So, Apple is more of a traditional, I would say, company in terms to look at, but there are these

kind of industry or sector-specific companies that you will need to learn other metrics that are not the generally accepted accounting principle or IFRS or whichever it is in Canada. so they'll have other metrics that are not like they're not adjusted necessarily metrics but there are metrics that they're applicable to that industry and are very useful and that you should be looking at but just something to keep in mind yeah they'll have a lot of like I could think of something like a pipeline which kind of calculates its it's distributable cash flow like it's obviously it's not an actual accounting statement that they can will be like that utilities yeah and i would say though for those just make sure that you look at the definition

because they're not generally a gap or basically official metrics even though there are generally generally like companies will generally calculate them a certain way it's always important that you check they'll have a section that explains how they actually calculate it so just make sure or where how they calculated because it can vary from company to company. Yeah, like say an NBridge's calculation will be different from a T.C. Energy's calculation. It's all the thing about adjusted figures is they can adjust out whatever they want. So you do have to kind of pay attention to this in that regard. Like most, most companies are honest, especially when you get to like the larger ones.

like they're going to adjust out one time expenses that probably aren't going to hit earnings on a recurring basis so it doesn't really give like the one thing I can think of is TD with all their anti money laundering like the the big fines they paid are not going to be recurring they paid that fine one time it did hit earnings quite a bit but they adjusted that out to kind of give you a better picture of how the business will be moving forward because they're not I mean obviously it's never guaranteed they could be fine more in the future but they're probably not going to have to dish out $3 billion next year. So when you see all these adjusted numbers, they're usually doing it to kind of get rid of one-time expenses that aren't really

going to impact the company long term. But you do need to figure out what adjustments are being made. It's pretty easy to do so. They'll usually have a footnote or something where they make all the adjustments or they're just going to state it right there. But generally, like generally I tend to look at free cash flow, price to free cash flow much more than price to earnings. I don't really look at the price to earnings much at all because I do believe the price to free cash flow is the better ratio to go off of, mostly because, you know, the income statement has a lot of stuff on there. That's, you know, for tax related purposes like depreciation, amortization that might not necessarily cost the company any money, but they can kind of put it on the income statement to reduce earnings

per share, whereas free cash flow is kind of a better measure of the actual cash generation. But there's also some industries you can't really do that with. Like you said, banking, that's going to be more earnings per share. But insurance companies as well would be probably earnings per share. But the free cash flow is also a lot better in regards to companies that make a ton of acquisitions. You're probably going to find a better picture with free cash flow rather than earnings because if you have a very acquisition heavy company, they're going to have a very acquisition heavy company, they're going to have a lot of amortization on the on the income statement

depreciation things like that and on the cash flow statement it's it kind of adds that back in and then gives you a better picture because all of that stuff didn't actually cost the company any money in that year it did at one point they had to lay it out in one year but then they depreciate it over time so I generally use price to free cash flow and just free cash flow generation in general but there's going to be industries where you can't do that. Okay. Yeah, exactly. In this kind of market, I like having some cash on the sidelines. It gives me the flexibility to jump on opportunities when the right stock goes on sale. But just because the cash is waiting, it doesn't mean it shouldn't be working for me. That's why I use EQ Bank.

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action. With tools like CPP, RSP, TFSA, and mortgage calculators, the globe offers a full suite of resources to help you plan, invest, and stay on track, no matter where you are on your financial journey. Ready to invest in you, visit globeandmail.com slash subscribe for unrestricted access at a special introductory rate. So let's move on here just to keep us on track. So another thing here that I'll pay a lot of attention to is share buyback stock based compensation, free castle per share like you mentioned, which is, we'll give you a good idea of how shareholder friendly the company is. If the company, of course, is paying, for example, buying back shares, I'll usually make sure that they're doing it like in a half decent way.

Responsible way. Yeah, responsible way. I was going to say a non-stupid way, but it doesn't have to be buying it at the bottom obviously it's going to be very hard to do that but buying it at reasonable valuation i think it's important because you get into the issue of companies issuing a whole lot of stock-based compensation especially in tech and then buying back shares to almost offset that which is not good for shareholders and they tend to do it pretty much all the time because they want that share count to not go up too much so you just have to be careful here it's like kind of a way for them to reduce their expenses through shockback compensation, but it's still not a great deal for shareholders because you're getting, at the end of the day, you're just, you're getting pretty much diluted

without like trying to show it. And in terms of the company paying a dividend, I'll look at the track record of the dividend and the payout ratio versus net income, but also free cash flow. And then for the valuation metrics, I think you mentioned that. I'll look at the price to free cash flow, price to sales, price to earnings. I'll look at all of them. Depending on the type of company, I may look at price to book, like banks, for example, that can be useful. More heavy, kind of heavy asset or heavy traditional companies, price to book can be useful. Again, I'll look at all of them for the most part, but it's important to just put them into context. We talked about that, I think with waste management and waste connection, where trailing 12 months or forward earnings,

You just use your judgment here because if a company is very stable and predictable, then the Ford P.E. or Ford Price of Free Cashel can be a very good metric because it's easy to predict what's going to happen. But if it's a company that fluctuates a bit more, then you're probably going to have to, I typically like to look at the trailing 12 months and then make my own assumptions going forward. That's usually what I'll do for those companies. Yeah, the more consistent the revenue stream and the more like the longer a company has put up solid results, obviously the forward earnings and forward free cash flows are probably going to be a little easier to predict. I would say like in terms of price to sales, I really don't use that metric at all. I think it's one of the more, I don't want to say useless, but one of the more like ineffective ratios to use. Just because it just kind of compares, I mean, the price of the company, the revenue it generates, which really doesn't tell you all that much. If you compare it against peers, I guess it's good, but I tend to use enterprise value to sales. So enterprise value will mostly, it'll have the company value plus the plus like factored in debt and cash, which is kind of more of a, it's a better indication, especially if you have companies that are like very early on in the profitability cycle, I guess. Yeah, I mean, I see that. do it just pretty similar in terms like you're just essentially comparing the market cap for one and then

the other one you're just adding and debt and debt and yeah subtracting cash so yeah but it's true price to sell again these is just one of them that I'll look at it's more useful for I grow companies that may just be barely profitable or not profitable that's when any kind of sales metric whether you're using EV or price to sell will give you a good idea yeah I just find like EV to sales is because price to sales won't factor in the fact if a company is taking on a mountain of debt, you know, inefficiently to actually generate that revenue. Price to sales won't show that, whereas EV sales will. So that's just one I generally use more than price to sales. But if I was using price to sales, it would again, in isolation, it doesn't really tell you much

at all. It's more so against peers. Yeah. And I mean, at the end of the day for me, I don't see much difference between the two just because I'm already looking at the debt. So I already know whether they're using a whole lot of debt or not. So that's kind of my approach. But that's fine. Like we I think at the end of the day, we'll probably end up in at similar points. We're just taking a slightly different approach when it comes to the valuation here. And then the last things that I'll be looking at just to not make this too long, I'll kind of rapid fire here. And then you can just let me know at the end if there's other things that you look at or I missed. I'll look at the management team. Do they have a stake in the company?

Do they own a decent portion of the company? Is it founder-led? Have they been shareholder-friendly? Like I mentioned, for buybacks, have they done that in an intelligent way? Since when has the current management team been in place? Are they good at executing what they'll want to accomplish? Is their guidance usually on point? Or they tend to be overly optimistic or conservative?

or are they constantly just missing guidance or saying things that they're misleading investor? We saw that with Intel not too long ago where they were basically saying that the dividend would be fine. Like they would continue paying a dividend and then they came out a few months later and saying they would be cutting it at half. Like that to me would be a big no-no for a company. That's an obvious example. But BC would be also an easy example where they came. kept saying that the dividend would be fine would be fine when clearly they had to do something and that to me it would be a fireball offense for the management team but they're still in place

and I get the big pension funds like them as managers and they're probably not rattling any feathers so I guess that's why they're still in place that's my best guess now that much of an incompetent team is still but anyways let's not go into BC here but you can get a lot of that information by listening to conference calls. So you don't need to listen to all of the conference calls over the last like 10 years, for example. You don't need to do that. But for me, I'll at least listen to the most recent quarterly call and then three annual calls just to get a sense. And I'm talking to listen here. You can do more than that. If you'd like, that's fine. But I like to listen to see how they react also with questions from analysts. I want to see their tone when they talk.

there are things that didn't go well that now they're kind of changing. These are all things that you'll hear that you won't be able to see in a transcript or if you take the transcript and you put into chat GPT or AI or another AI and sure it'll summarize it up and that's fine to do for if you want to look at a broader set of calls maybe you listen to three and the most recent earnings call and then the other calls you actually just summarize them just to get an idea how things evolve. like you can do that as well. These are like I said just my method, but I think it's important

to listen to those calls. And then other important things is what is management projecting for growth? How will they achieve that growth in the future? What's the time frame for that growth? Are they looking to return capital to shareholder via dividends or buybacks? Some management teams will be very straightforward. Some companies that are more established will even have dividend policies. How are they looking to integrate AI in their business? And what What are the expected outcomes? I want to do a deeper dive in the business model, right? Like at this point, I'm pretty far into looking at the business.

So if I've reached this point, it means that I'm likely interested in the business as a potential investment. So that's why I will want to start diving deeper. And that's my approach. And the reason why I do it that way is if there's some significant red flags that happen prior to reaching this point, I'm probably not at this point. I'm just stopping. Like if there's some significant red flags, like they're diluting shareholders way too much to my liking, well, you know what? That's probably, that's it for me right there. Like, that's probably a big red flag. There could be other ones, but I'm not getting to this point and wasting time when there are

some big red flags that make no sense. And then the last thing is I'll want to understand the risk of the company and then I'll want to establish a bull and bearish case and understand the pros and cons for for each of those yeah I think this is probably like one of the more important elements because a bad management team can absolutely destroy a company even like a promising company I mean I would I would give one example would be light speed of just a management team that absolutely butchered it really I mean they spent Ben, I mean, I guess a couple examples I would say is, is like an indication of a quality management team would be like the last six months would be TFI, where, you know, on the calls, they were

blunt, they were honest. They, you know, they said how bad it's going to get. Ultimately, it was kind of a rip the bandaid off type situation where the stock price took a dive. But on the flip side, you had a company like Lightspeed for, you know, a year or so they did everything they could in the headlines to try and pump the stock price without buybacks potential sales i can't remember what else they did dax dax was a probably never turned down an interview request from yeah and that's for sure yeah so when you have like like you have a team like tfi who's kind of just solely focused on getting operations back to normal where you kind of had light speed was just trying a media binge kind of to try and support the stock price like it's it's a big thing obviously share buybacks and dividends

mistakes like this can essentially erode your capital over the long term what was it it was the quote by buffet oh yeah you said you have you you want to buy businesses that are so wonderful and idiot can run them because eventually one will yeah yeah that's right yeah like management teams are huge like consistent history of delivering would be be a huge thing. I mean, you look to a company like Constellation, which is effectively made successful acquisitions for multiple decades. I mean, there's going to be a lot of confidence in that. And I guess the final thing I'll go into is like just focusing on, I mean, common elements that are probably like publicly known. Like a lot of people will kind of buy a company say because

it has a strong moat. But I mean, like things like this that are publicly known, the price is going to be reflected in this already, I would say. Like if you, for example, if you look at the railways, the railways are never cheap and that's because they have that moat. You're not gaining any sort of advantage buying CN Rail because it has an economic moat because the market already knows this. The price reflects this. Same with like the garbage disposal companies we talked about. I mean, there's a reason they trade at 30, 40x free cash flows like the market already knows this. I mean, when you're looking at these companies, you need to dig a bit deeper, especially like we just talked about the management teams things like that just overall looking into the financials

surface level stuff you know the market it's pretty efficient at kind of pricing this into it as is yeah yeah no exactly so i think that's that's a pretty good point i know it's for some people it may be pretty obvious that are more experience in looking at companies others hopefully it was are useful to just hear in terms of our point of view, well, just the way we actually look at companies, analyze companies, and I really try to do it and say it. And I think you have a similar approach. But for me, it's just time efficiency. I think it's very important because I don't have hours out and end to find new companies. And I really need to, I've developed a way where I can weed out a whole lot of stuff that I know I will end up not

buying. And the point is to find good ideas, not to find companies that are some decent ideas. So that's the way I approach things. Maybe other people will be different approaches. And again, for the screeners of type companies, I'm looking more for companies that are growing and profitable, but maybe you're looking for more value kind of companies that may not be growing, but they're trading at a super cheap discount. And you think that there's going to be an expansion. of multiples for these companies because the market is too down on them for X, Y, Z reason. That's really, that's up to you. That depends what kind of company you're looking at. Of course, maybe you want to look at microcap companies. That's fine. You'll want to adjust in terms of if you're using

screeners, you'll want to adjust that. And you probably will want to adjust some of the things. Maybe you're looking at in terms of analyzing the companies as well, because the microcap companies will be very different than some large cap companies. So it's more of a starting point. We have certain criteria we use, but it doesn't mean that you can't use other criteria if it fits what you're looking for. Yeah, I think if we were to do like a full,

full in-depth, like looking over companies, it would run on for a very long time. But it's a good starting point. The one thing I will say, as I mentioned before, is you should be spending substantially more time on the dives into the companies, then you should screening for the companies. And I mean,

it's important to not only look at just raw numbers, like price to earnings or price to free cash flow, but to actually understand what the business does, how it's expected to grow, not just because it's cheap right now. Like, you need to understand the business. You need to have a thesis for the investment so that, you know,

six months from now when it's down 10 or 15%, you don't know if you should sell or you don't know if you should buy more. I think if you actually properly analyze a business and come up with a solid reason to buy, it kind of gives you that reason you can revisit, you know, when it hasn't worked out in the next six months or a year to decide whether, you know, you should move on or hold it. I mean, a prime example would be if you bought a company, I mean, this is very simplistic, but because it's growing earnings at a double-digit pace and for the next two or three years,

it slows down to five percent. it becomes a pretty easy decision to sell that company because obviously the reason you bought it has changed. I find a lot of people kind of look at the numbers and buy the companies based on the numbers and then they really get into a situation where they don't know what to do a year or two from then when the company's up 100% or down 50%.

Yeah, no, I think that's a good point to end it on. So hopefully everyone enjoyed the episode. It's some extra content we're recording in advance because we will be taking a little bit from recording for the last two weeks of August, but as we've said again, again, I don't know the exact sequence of releases, so we're still figuring that out. So you may have heard me say that a few times already, but we're just making sure you're getting some fresh new content, and hopefully this was useful, and it will help you in your investing journey. We appreciate all

the support we get from everyone listening. If you have comments, good or bad, as long as are constructive. We're always open to that. So make sure you let us know. If not, I hope you're enjoying the end of your summer. Beautiful weather outside and go spend time outside with the family friends. If you're solo and you have AirPods or something, you can listen to the podcast. So it's perfect. But thanks again, everyone, for listening. And we will see you again soon. The Canadian Investor Podcast should not be construed as investment or financial advice. The host and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.