The Canadian Investor - TD is Now the Most Shorted Bank in the World

Episode Date: April 13, 2023

In this episode, we look at several Canadian acquisitions and mergers that were recently announced. We also discuss the risks of day trading in a TFSA and why TD Bank is the World’s most shorted Bank Symbols of stocks discussed: TD.TO, HEXO.TO, ZZZ.TO, TLRY.TO, KMX Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital 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  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.See omnystudio.com/listener for privacy information.

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coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast date is April 11th. My name is Brayden Dennis, as always joined by the radiant Simon Belanger. Welcome into the show everyone everyone today we're going to get into the news we're going to talk about td the world's most shorted bank the tfsa and day trading uh there was a uh

a recent court case we're going to discuss um some earnings and uh some acquisitions by uh good old sleep is this sleep country yeah yeah sleep country here in the notes yeah yeah sleep country and also an acquisition from uh till ray so in the cannabis space as well yeah a little bit of weed and then you sleep on and you sleep it off there you go the casper mattress uh i'm always baffled by sleep country's ability to keep going you know like it just seems like such a a business model that would just be have have gone away with sears yeah no and they like the same same people shop there, I mean, we'll get to it. And I pulled off some a few stats in terms of sales and free cash flow. And they've been doing pretty well, like surprisingly.

Surprisingly good. Exactly. Like I was I surprised myself when I looked at the results where I'm like, OK, this actually seems pretty good. Yeah. Interesting. All right. actually seems pretty good yeah interesting all right um on most headlines the short interest in td bank has uh they've stolen a lot of headlines what's going on here give us the the synopsis yeah so the headlines were that i'm sure some people saw it is is that TD was the most shorted global bank. The largest shorts in terms of banks and total dollar value, and that's really important,

it's in terms of dollar value. So there's TD at the top, PNB, Paribas at the second here, Bank of America, JP Morgan, Chase, and then it goes down. So TD is at the top here. and then it goes down so td's at the top here for example jp morgan chase is at just below 3 billion where td has 3.7 billion usd in short interest against it topping the charts there but you have to take that with a little bit of a grain of salt because it's not the most shorted bank when you look at the percent of the flow that is being shorted. If you look at that, it remains very low at 3.3% up from 2.8% from a year ago. And essentially,

what this means is there's still not that many shares of the overall tradable shares that are being shorted if you take that into account. Of course, if you look at the pure number of 3.7 billion in u.s dollars it looks like a lot but you know it's not it's definitely like not taking into account the size of td but clearly it's more shorted than jp morgan chase which is lower and obviously a larger bang than td and for those not familiar with shorting because we do talk about a decent amount on the podcast, it just means that people are betting against the stock without going to the details of how it's done. But essentially, if you short a company, you're betting that the stock price will go down versus going up like most people do, ourselves included. We invest in companies because we believe that ultimately the stock price over the long term will go up.

So there's a couple of reasons here. Do you want to add something before I tell people essentially some of the reasons why there could be an increased short interest in TD? No, I think that it's important that you specified, you know, the short interest as a percentage of the float because, you know, you see like, you know, the headline and of course it is panic inducing. And of course, that is the goal of the people writing the headlines. Particularly hot takes other than, Simon, you know how you could lose a lot of money over the last 20 years? Being short, high quality Canadian banks. Like, has that worked at all? No, I'm not saying that that's, you know, short term versus long term. I just think that it's absolutely silly. And I am not a bank stock

investor, but I do see this as an opportunity. I'm not a bank investor in general for all of the reasons that have occurred in, you know, what, two months-ish? For all of those reasons. But shorting Canadian banks, I think, is an absolutely sure way to lose money historically. Yeah, historically hasn't done well. And I think if anyone's interested in shorting in general, I think you have to really be sure of what you're doing. And that's why the best short sellers usually don't end up shorting that many stocks. They do a whole lot of research. And then when they actually figure out a company that's worth shorting they go ahead and do it and it's usually some pretty sizable bets

as well right it's not you know 0.5 percent of their their portfolio it'll be more than that but shorting banks in general i mean i i'm not as well versed as some people are on banks clearly have been digging into them quite a bit more with the banking crisis, and I've learned a whole lot on banks themselves. One thing I would say, if anyone owns banks, you should probably have a good understanding of what their assets and liabilities actually look like. And I'll talk a bit more on that in future episodes, but just not not just a balance sheet, but understanding what type of loans were predominantly they're exposed to, and things like that, which takes quite a bit of time. If not, personally, I would just go with, you know, a basket of banks then or kind of index fund or ETF that invests in a series of banks. So that's the way I would approach it, just to alleviate the risk associated with a specific bank, for example.

Yeah. As soon as this headline caught the attention of the investing community, the stock sharply lost like 17% of its value over a few trading days, which is considerable for a company of its market cap for sure. But look, I am probably the last guy to be buying TD Bank stock right now. But hey, I do see this. If you are bullish on Canadian banks, I do see this as an opportunity. That being said, I see lots of problems with almost all Canadian banks. And I've seen those problems for a long, long time. I've been wrong. If you're keeping score at home for the stock price, mostly wrong. But I certainly have my concerns.

If you don't share those concerns, I don't see how you don't see this as an opportunity on TD particularly. Yeah, no, exactly. And so in terms of the four things that most likely are leading people to short TD, well, the first one is they had agreed to pay $13.4 billion to purchase a regional bank called First Horizon before the banking crisis. Now it's unclear whether this is going to go ahead or not. Regulatory approval had already been delayed. approval had already been delayed and the market cap of first horizon uh when i last checked uh friday it was or over the weekend it was around 9.5 billion so clearly pretty significantly less than what their offer was and the regulatory landscape for bank is also likely to change in the coming months and years so there's extra uncertainty especially for a bank like TD, who has a lot of exposure in the U.S.

So one thing that I can know with almost 100% certainty is that with the fallout of SVB's signature silver gate in the U.S., you're going to see regulators there having different regulatory requirements for banks. I think that's almost certainty. What will they be? I think that's a big question mark, but we can probably make some guess. The second reason here is they do have quite a bit of exposure to the Canadian housing market through mortgages. And especially if employment kind of slows down in Canada, that could spell trouble for them over there. They own around 12% of Charles Schwab, which is seeing some trouble because it also has a lot of held to maturity assets, just like Silicon Valley Bank did.

So that could be an issue for them. Without digging into this, there are some key differences between SVB and Schwab, but their depositor base is definitely less concentrated than it was at SVB. So there is a little bit of, let's say, uncertainty regarding Charles Schwab. Basically, from what I've read and what I looked, they're not liquid right now. So if all their deposits would actually flee schwab they could be in trouble but i don't think that's likely to happen because the depositor base is much more diversified and it's also 80 of their depositor base that is insured versus svp that only had 15 one five of their deposits insured but i think people still have SVP in the back of their mind.

So that's definitely weighing on TD with having such a large stake into Charles Schwab. And the last one, but not least, TD is one of the 10 largest banks in the US by assets with just under $400 billion in assets. And that's their US assets only. If you included TD, their worldwide operations, obviously including Canada there, they would actually be the third largest US banks with all their assets. So it's kind of crazy. And the big six in Canada would be in the top 10 of US banks if you included all their assets. So that gives you an idea how big uh banks in canada and how

consolidated it is versus the u.s where there's a slew of regional banks i think we're already starting to see consolidation there but it's nowhere near what what it is in canada well that's a fun fact i love fun facts and that is certainly a fun fact. Dude, Charles Schwab bought TD Ameritrade from TD, John Dominion, in 2019. November 25th, I believe, is when the news came out in a $26 billion deal. So that also tells you the ties between them. ties between them. Look, you get the catalyst of... I don't even know if it's a catalyst because how long have people been bearish on Canadian mortgages? That seems like to be the old song and dance since I've been an investor. And then you compound that with the bank issues and the Charles Schwab issues. It just looks like a trade for a lot of these funds that are going short on.

It looks like just a trade opportunity. So I don't know how long they sit in that. We'll see. And also potentially arbitrage, right, with the First Horizon potential deal. Like there's a lot of people saying that they'll look to renegotiate that at better terms. And I mean, I have no idea whether there's a breakup fee or whatnot. But considering the state of regional banks in the US, I think it's probably in first horizon's best interest to actually, know maybe play ball there but uh

we'll we'll see anyways it's the one thing i'll finish on is just make sure 13.4 billion was the the ticket price the agreed price yeah okay and i think for most people just make sure you read beyond the headlines i think that's the the moral of this. Yeah, there's still a decent amount of shorts, but it's not as big as it sounds if you're just looking at the headline in terms of the most shorted bank worldwide. The reason it also gets this kind of visceral reaction is you get such a blue chipper

that has that kind of headline. That's what has such an an intense reaction i think from people yeah no i mean and fun fact actually i had uh i had to cancel a few family dinners just because of my back this weekend but we did go to one and uh you know one of the family members that knows I have a podcast, first question he asked me was, should I sell my TD stock? Yeah. It was like a trending search in Canada. Yeah, probably.

But it was kind of just figured I'd make you laugh. Yeah, that's good. Dude, I hope your back's okay. It's doing a bit better. Trending better? Yeah, it's doing a bit better. Okay, good. I got physio, so I'm hoping she'll be able to do magic on it this week. Yeah, yeah.

You and Adrian from Stratosphere, you guys both heading to Cairo tomorrow for your backs. The young guys who are both specimens of athletes have the back issues. I hope you guys get better. 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 the app store, and I'll see you there. All right, let's talk about the TFSA and day trading here from the globe. A tax court judge has ruled that an investor who had day traded stocks in his tax-free savings account must pay taxes on the income, opening the door to huge tax bills for other frequent traders.

Tax Court of Canada Justice David Shapiro ruled that the investor was running a business inside his TFSA, which grew from 15,000 to 617,000 over a three-year period. So from 15K to over 600 grand. Hey, nicely done, sir. Well done, buddy. Wow. What in the GameStop did you do? I'm going to say it was probably in 2020 and 2021. That's going to be my guess.

Well, probably not 2022. Oh, you said 2020. Oh, my bad. 2020 and 2021. Yeah, you said 2020. Oh, my bad. 2020 and 2021. Yeah, you're right. You're right. He traded those time periods and then just went to sleep. You know, he got locked out of his brokerage, luckily.

So this is making news on the website that everyone is so nice on and gets along so well on called Twitter. And the reaction is confusing because this is not news to me. You've never been able to day trade in your TFC, but there is a slightly gray areas to this in how it's written. So I'll give him the benefit there. The comments were endless amounts of people that like seemingly just genuinely didn't know you can't day trade in your TFSA. And TFSA language and how it's written, there's a lot of legalese and it's a little gray. but you and I have said on the podcast several, several times here, now watch out, you might get a tax bill if you're actively trading in your TFSA. And I guess if you don't do the research yourself or listen to this great podcast, there are millions of brokerage accounts that opened in 2020. That's the number that IROC posted was 2.1 or 2.1 or 2.6, whatever. Over 2 million brokerage accounts were opened in the year of

2020. And that year, the stock market casino was alive and well. It was alive and well, as you just mentioned in 2021. And your broker isn't saying, hey, you can't do this. You know, your broker's not telling you that. You know, your broker's not saying, hey, dude, you racked up hundreds of trades today in your TFSA. You can't do this. In fact, they're loving the trade volume. Of course they are. It's their business. So to me, we knew this, yes. But yeah, the language was very vague. I don't know if you have that language up in front of you or you can speak to this. You probably know better than me. But if there have been other cases like this involving the TFSA and day trading, I'm not sure. But this does set the legal precedence and shows the CRA

stance on this, that if you're going to use your TFSA for short-term active trading, it constitutes as business activity and you could be seeing a tax bill. Yeah. I mean, I've read the language before. It's been maybe a year or two since I looked at it the one thing that i can remember clearly is it's not clear i can remember clearly it's not clear and i mean it is it is very ambiguous so it doesn't the issue with it is doesn't really define what day trading is so i think that's the biggest issue that people can face into is like where's the cut off right is it um intraday is it intra week is it intra month like yeah exactly so i mean i really don't know i guess if you go by what day trading means is you'll kind of be in and out of a given stock within the same day

um i think at the basis that's what it means but again i think think that the basis, that's what it means. But again, I think, unfortunately, that the law was written in or at least whatever documents that they have on the CRA website was done in a way that it's still a bit unclear what the kind of cutoff is. I'm sure if you kind of buy a stock and you sell one and that's the only thing you do in the same day but you never do it again it probably will be okay don't take this as advice thinking it will be okay i'm just thinking logically it will probably be okay there i'm assuming they're probably going after people that have like large volumes of trading so i think that's probably what they're doing because you know what's the point going after someone who has $5,000 in their brokerage account and on one or two occasion kind of, you know, bought and sold for $500 worth or whatever it is, right? So I think they'll probably go after the bigger fish like this one, which makes more sense. And they know they can actually win into court.

That was brilliant. It was so clearly unclear. And yes, I agree. That's the synopsis that you and I had last time we were looking at it. And look, they're going to look at the people who have large sums of money in their TFSA because those are the ones they can send a tax bill to. Exactly. Like, you know, the people who saw gigantic losses from their trading activity don't have any tax to pay. No, that's it. Yeah. So, it's, I think, yeah. I don't know.

It's, like I said, I don't do that. I mean, the most trading I've done on stocks is probably buy it and then sell in within six months or something like that right so it's not uh i'm fine with it but just be aware that it could create some issues if you get into the habit of trading too frequently in your tfsa yeah and it's like so many of these things with with taxation and and gettingited. It's like, yeah, probably going to be fine, but why the headache, right? And the stress. And the stress.

If you're going to day trade, do it in a taxable account. All right. We got a merger happening. We got a couple of mergers here on the news. We got a couple of mergers here. Yeah, a couple of mergers. Yeah, this one is Canadian crypto exchange mergers. So Canadian crypto exchanges, Wunderfi, ticker WNDR, Coinsquare, Coinsmart have announced that they will be looking to merge. All three companies combined would result in 1.65 million users and more than $600 million in assets. And according to WonderFi, it would be the largest Canadian

crypto brokerage. So that's something definitely to take note. For those not aware, Kevin O'Leary is a strategic investor in wonderfi um as a side note here hopefully for him it's a better investment than ftx but uh i will see whether that pans out or not and if it goes through like i said um they'll be the largest company and once finalized wonderfi shareholders would own 38 of the newly formed company, Coinsquare 43% and Coinsmart 19%. So something to keep note of. I know not everyone's interested in crypto, but this, my understanding is that it will still be traded on a public market. So something to keep an eye on. And I guess we're seeing some consolidation in that space.

to keep an eye on. And I guess we're seeing some consolidation in that space. I can't see how too many people would be excited to own this business in the public markets. Well, yeah. And right now too, especially in the States, there's a lot of regulatory action,

especially by the SEC in Canada. Like there hasn't been too much. I looked in the budget, didn't see too much on crypto per se, aside from them looking to kind of restrain pension plans for, not restrain, but getting pension plans to actually disclose if they're investing in cryptocurrencies or pension projects. But aside from that, there hasn't been too much in the States.

I mean, there's still not really clear regulations when it comes to that. So you're seeing different agencies in the U.S. kind of fighting to impose regulations. And then now crypto exchanges are actually starting to fight back into court because they're saying, well, you know, you're interpreting the law this way. But there's actually we don't agree with that so it's probably going to be decided to court because as you know and a lot of people know if they follow u.s politics um they can't seem to get bipartisan support on legislation unless it's for something against china so um we'll see whether there's actually changes there and if there are changes there whether it impacts their regulatory landscape in canada because at the end of the day there's a lot of influence from what happens in the u.s to canada this so this is the uh mr wonderful kevin o'leary yeah one yeah

that's what i was saying i hope it works out for him better than this ftx investment if they hey if they need capital i don't know if you know Shark Tank, so you may or may not get this joke, but if they need extra capital, I have a royalty deal I can propose for him. Okay, okay. You ever watch the show? Oh, yeah. Usually, I mean, back in the day when he was on Jack. Okay, we need $300,000 for 10% of our company.

He's like, okay, I hear you, what you're saying. I'm going to not answer what you actually want. And I'm going to give you debt via royalty. Or give you the money you want for 80% of your business. 80% of the company, yes. Dude, Coinbase went public in April 16th. So basically exactly two years ago, right? Yeah, exactly two years ago, January of this year, it hit a low of $33 after IPOing at $342. My goodness, a 90% drop in the value of the stock.

My goodness, a 90% drop in the value of the stock. Now, it's rallied quite a bit like most of these risk on tech stocks have this year. But my goodness, what an IPO debut. I mean, they chose their time well, that's for sure. Yeah. I mean, they chose their time well, that's for sure. Yeah. But Coinbase is actually the company that says it will fight back with the SEC if they bring enforcement on them and they don't agree. So they have the wherewithal of actually fighting into court. But you've had other crypto exchanges that just settled.

So the SEC recently, I think in the last two weeks, they issued them kind of a notice saying that impending regulatory action basically it's a heads up telling you you know you want to do something about it or it's coming uh that's my understanding of it so uh yeah it's always i mean their timing was good with ipo because they definitely um capitalize on the markets that's for sure yeah i just wonder like you know yeah you get to raise a boatload of money on your IPO, you get some liquidity, the insiders probably cash out quite a bit. But then you just, you know, you had this asset that was mark to mark on private valuations from venture capital that just seemed to go up every single round, no matter what, to holy smokes, 90% of the equity value, the equity is down. You could argue both ways about the luck of that timing, right? Depends how you look at it. 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 talk about CarMax. If you thought this game was easy, CarMax reported earnings this morning, okay? The headline numbers come out, the stock fell like 8% immediately. It's now up 10% on the day. Let me just verify what it's at. Yeah, what it's at. Yeah, 10.5% in today's trading day here, April 11th. And so, you know, no one knows what's going on. Now, this is a business we should certainly have every quarter in our earnings roundup because it's the shoulder season, so we can talk about it. And it's also just such a great proxy for the used car market. For context, CarMax sells with their retail locations, about 4% of the US's used car market via wholesale vehicles and just used vehicles. Those are the two segments.

And the headline numbers were pretty grim, to be honest. Sales were 5.7 billion, which was down 25.6% year over year on the top line revenue. Only down roughly 7% for their fiscal, because this is their fourth quarter, but still pretty pretty bad. Earnings were cut in half from 98 cents to 44 cents, and even worse, down 56.5% for the full fiscal. Now, how do you read this and the stock is up? Well, they beat guidance. And that's how bad it's looked for these used car retailers, for cost pressures on a per unit basis and demand. So used car vehicles in units was down 12.6% in sales, wholesale down almost 20%. The silver lining here, I guess, is that they were able to keep margins really solid on a shrinking unit sales and average selling prices. Both of

those they're up against. And they were really good at keeping expenses in SG&A down, which is a nice signal to the market these days that they're able to just flex that operationally as they need to. The market in 2023 loves companies that easily can pull levers to boost profits, raise prices, and shrink expenses. That might be a bit of a stretch here for CarMax, but look at Meta and look at Airbnb for two examples. They say happiness is expectations minus realities. And stock price reactions are just expectations minus realities, you know? And stock price reactions are just expectations minus performance. Looking out a little bit longer term, CarMax has been a really good operator. They've grown the store base and they've grown the number of cars they sell

at a really, really nice clip. Like this fiscal ends with 807,823 cars sold. And that number was, you know, in the 400,000s in 2013. So they've basically doubled it during that period and more than doubled it on the wholesale vehicles number. So, you know, overall impressive, you know, there are some absolute duds in this space. I don't think CarMax is one of them. I think that, you know, the Carvanhas of the world, those companies are probably destined for a chapter filing at some point. But this one is a good business business it's over 10 billion in market cap uh good operators nice little network effect huge economies of scale but look at them you know they're playing in a macro environment that i'd throw up in the commodities type category of really hard to

consistently be great yeah i think the one thing that may be bullish for for a company like carmax is because used vehicles are cheaper than new vehicles and if we are going into an economic downturn um this that might actually put a floor in terms of the number of units sold because you may have people that need to buy a car and in better times they would have considered a new car but now a used car is kind of the logical option or the only option for some so i feel like they may kind of benefit from the economic cycle in a weird way if you understand what i'm saying no i do for sure i mean everyone knows i'd hope so i i would say that it is very common knowledge in terms of personal finance that a used car is a much better

purchase than a new one i think that's kind of like drilled into every you know like grade 10 in civics and career class or whatever like you like you know the class where it's like they teach you the basics of adulting you still don't know how to do your taxes but you can do some other stuff and you like learn like don't buy a new car it's a bad idea so i i hear what you're saying i think that you're probably right in terms of a floor being created there yeah no exactly um now i guess we'll move on to what we alluded to so sleep country canada is buying casper mattresses canadian assets so they announced they would be acquiring it for 20.6 million casper for those

not familiar i mean i think a few years ago they were doing so many commercials, but essentially it's a mattress in a box company, primarily in the US, but they had some Canadian operations. Sleep Country Canada already has a mattress in a box operation because they did the, and they acquire Andy in 2018. And Sleep Country Canada has a market cap of just under $800 million and they do pay a decent dividend that's yielding 3.5%. And like we were talking at the beginning of the show, they've done pretty well. Not a company that I follow closely and might I say they have the best ticker.

Dude, the ticker is amazing. It's ZZZ. Dude, the ticker is amazing. It's Z.TO. ZZZ.TO, right? Or ZZZ, depending, you know, how people say it. Which one's the Canadian way? Z, right? I don't know. I just get confused.

Z, okay. I don't think I say Z anymore. I think we had an email on that saying we should be using Z instead of Z. Dude, when we get those emails i'm just like oh god you have so much time it's funny anyways there you go however you want to say it it's triple zed i only heard you say one zed so i was like isn't it zed zed zed like yeah but it's yeah oh it's like sleeping yeah right you're right um but anyways they if uh for people interested in that company they've actually grown revenue at a decent clip over the past seven eight You're right, you're right. get some additional sources of revenue but uh free cash flow per share has actually been quite

impressive like mostly on the uptrend since 2015 like not fully straight line to to the top right but you know pretty pretty close in terms of consistently going up over the over time so pretty interesting company just at a glance i've never dug into the business itself but just looking at those two metrics um definitely better than i expected way better than i expected this is the beauty of stratosphere because you can just graph it out and see like that is not the graph i expected sleep country canada to have for either revenue or free cash flow share yeah i mean either i did not have that on my i guess mattresses they have a you know after what like four or five years if you have the same mattress like they just they don't feel the same anymore and i think most

people would be reluctant to buy a used mattress i I think that's probably, I mean, I would be. Yeah, like I'm not going to a marketplace to buy a mattress. No, exactly. I'll buy a bedside table, but not a mattress. Yeah, so I mean, at the end of the day, maybe it's just a better business model than we think. Maybe it is. business model than we think maybe it is well this this compromises what i was going to say about my business about my uh my comments here because okay i think this is a trash business and i'm thinking maybe it's actually not maybe people buy mattresses more than i

i think that they do you're right like people probably replace their mattress what every four or five years? There's more of a recurring element to it than I think I'm giving it credit. Yeah. And especially if you have like back problems or something like that, you probably even replace it more often because that's, you know, probably one of the top thing that you can do to alleviate those problem or at least the pain. Yeah. Okay. Well, giving Sleep Country some props here, I do have some comments about the VC-backed mattress game. And this deal was surprising to me because they already own Endy, as you said.

So they're acquiring the Canadian operations for $20.6 million. I don't know how big the business is outside of the Canadian operations for Casper. I'm not sure, but they already own Endy, which is like a uniquely Canadian brand as well. Like, you know, their logo, I think has like a Canadian flag in it, in the Endy logo. Why on earth were so many direct-to-consumer mattress companies getting hundreds of millions of dollars of VC? This is like, are rates too low? And you're like, yes, there's 36 million direct-to-consumer mattress companies. I think rates are too low. So I'll do a small segment here for the show on direct-to-cons consumer and e-commerce. Because on this exact topic, there's been a dramatic shift in direct consumer or e-commerce.

I'm going to use them interchangeably here, but let's just say direct consumer startups. So many of these businesses raise tons of capital. They spent millions on marketing the product. businesses raised tons of capital. They spent millions on marketing the product. And there was a few months in Toronto when every DTC mattress company had every billboard, every subway ad, every streetcar in Toronto painted their ads all over the city. Casper, ads all over the city. Casper, Endy, Douglas, Juno, you know, the list goes on and on. The problem, I don't buy a mattress that often. Okay, so maybe what, four or five years, maybe? I don't know. Like, I guess I haven't really noticed that. I think I've bought two mattresses as an adult in my life. The reality is that it's not that often.

How many mattresses does a person in their lifetime buy? I would love to see a stat on that if Sleep Country has that. What is the customer lifetime value of a mattress buyer? And the problem here is that if I spend $1,000 per customer to convert them, because you bet your ass they were spending lots of money in total ad spend to acquire customers. So let's just throw out a number, a nice easy number, $1,000. You better hope that they buy more than one mattress over the next three years. If it's me, me dirtbag who buys one every seven years, I'm not a good customer, right? So these e-commerce companies that are getting funded and are now working well have a really recurring and personalized element to them.

And there's three good qualities that I'm going to talk about here. One, you have to have a recurring spend that is actually sticky, becoming a habit or an essential part of the home that needs constant refilling. Number two, they have a personalization aspect of it. So if you have personalized mattress preferences, that's good. But this is huge in the health space. If I'm going to order custom vitamins, they send me some test kit to build a vitamin stack specifically for me, as an example. And number three, which is harder, but if you have a product that through marketing

can be perceived as better than the competition, but hard for customers to actually verify, this is a good quality to have. It's a scumbag quality to have, but it's a good quality to have. Let's give an example of a product I've never used, so I cannot hate on or endorse it. Athletic Greens. They paid Joe Rogan bajillions of dollars to say, this is the best daily supplement to drink. You get Dr. Huberman Labs, the famous podcast. This is the best supplement. Drink it every morning. It's called Athletic Greens. It's great for reason X, Y, and Z. And how are customers going to quantify if it is 99% better than the other options? I know this sounds ridiculous, but this is what's working.

So in my opinion, those are the three qualities that are good for e-commerce startups that can actually raise money in this environment and become profitable one day. Yeah, no, I think that's good. I mean, as a side note,

I do drink. Are you that funny greens guy? Yeah. Do you like it? I mean, I started, so my wife has had it for years so even before i think they got some of those sponsorship and i used to i got for a while i was um drinking green plus i don't know if you heard of that no it's like a similar thing it's just you know greens powdered greens that's what if joe rogan doesn't talk about it i'm not in on the call okay okay but yeah i mean i wouldn't be able to kind of all taste the same so i'm just

kind of trusting that you know the labels are accurate and it seems like it it does help my energy levels but whether one's better than the other i i mean i would not be able to tell the difference. Do you see why I mean this is a good quality of a DDC? No, exactly. So, I know I agree with that. It's kind of greasy, but it's true. Yeah. So, I didn't know you were an Athletic Greens guy. Hey, Athletic Greens, if you're listening,

we have a host endorser right here. His name is Simon Villalge. I haven't used Green Plus in years years so i'm open to letting i'm open for business baby uh all right last one on the day yeah speaking of green things uh cannabis consolidation in canada so i tried to transition as best as i could but but actually pretty big consolidation here. So Tilray, which is one of the top producers in Canada, will be acquiring XO by paying $56 million USD in an all stock deal. You may see different figures.

You may see another figure that's like around $225 million. That's simply because this deal will allow till rate to acquire remaining exo shares that it won't own since it will exercise a 173 million convertible debt that it had it actually had purchased the notes from a exo creditor last summer so essentially with the convertible stocks or convertible debt convert into stock and the 56 million dollar that they're paying for the rest. They'll own the entirety of the business. XO was in a really tough position.

I mean, I've been talking about XO being on the brink for what feels like two years now, but it kept getting worse and worse. And most of the times they were able to find some kind of financing, whether it was through dilution or getting some kind of debt like the convertible debt. But recently, they just hadn't been able to find some financing, whether it was debt or through equity. So in their latest earnings release, they were down to 34 million in cash. They also burned 23 million cash during the first two quarter of this fiscal year. So things were not improving fast enough, although they were improving for XO and management had mentioned that, you know, they just weren't able to secure any kind of agreement to improve

their short-term liquidity. So it was starting to look like they were running out of options. So at this point, I think it made a whole lot of sense for Tilray to step in, considering they had those convertible notes. And of course, cannabis has been a tough space because you're essentially seeing a race to the bottom in terms of pricing, right? So that's impacting profitability you're also saw uh you know what did became legalized and before that um the overall capacity was just

too high there's high taxes apply on that as well and the u.s still hasn't legalized the uh the cannabis space on a federal basis these are all things that um you know canadian players were hoping that wouldn't be a burden on them but it has been and we're just seeing you know overall you know it's just a race to the bottom you have low-cost producers like tilleray is starting to to get to and at the end of the day i think i still believe it will be a good business for someone in the next five to 10 years, but it's going to be economies of scale. So you're going to see that like other, you know, low margins industries is you're going to see a couple of big players that really have their profits on volume rather than high profit margins and that's consolidation is

essentially the only way to make that work is you need to make it worthwhile on a volume basis because it's just not worth it if you just do a smaller volume because you just don't have the profit margins involved you know the meme template uh where the grim reaper knocks on the door you know the first two doors and then there's the third door coming up i've just pasted it in the doc this should be captioned simone every time he talks about a cannabis company that is in dire trouble that some major announcements is gonna come and uh And, you know, the Simon Reaper was knocking on Hexo's door a couple months ago, weren't you? Consolidation was always the path for this industry. And we're seeing it play out.

It's, you know, in hindsight, so much of this was so obvious. you know in hindsight so much of this was so obvious and i will give us credit for being banging on the door on not on this for since october of 2018 well as long as this podcast has been around so we've been very consistent on that and consolidation seems like the only logical path for all of these players yeah exactly and you may see a few smaller players that kind of target their you know the premium market but that's going to be more niche a bit like you can see that into alcohol or you'll see the larger prayer player with uh one of their segment that's a bit more premium like you see with brewers for example so i i don't think that's uh out of the realm of possibility but at the end of the day i think the biggest problem that happened here is they overestimated the potential market for cannabis

in canada and they also were relying on you know they just didn't have the data to make these good decisions or they were making assumptions and that's the issue right if you're building a business and you say well you know the the TAM the good old TAM is this well the issue with the good old TAM is a lot of the time you're just not sure whether those numbers are true or not. And this was true with the cannabis space where even if you had a decent idea, first, it was an illegal market. So you didn't know for sure. And second, even if you knew for sure, you didn't know for sure to what percent of people would actually switch from illegal to legal. And those were the two biggest issues. And then people made, you know, they just bet bet on production not really knowing what would be required and that's a big big mistake

i think people thought like there's going to be all these new adopters to cannabis because it's legal and that was obviously overshot because that didn't really i mean anecdotally i don't think that played out at all like i don't think so yeah like you know the cusp the cusp the car the target market was already getting their hands on it uh which is just so obvious looking back but it is what it is i think this industry has a marketing problem the reason i i've been so consistent on this this industry has a marketing problem. The reason I've been so consistent on this, this industry has a marketing problem. With beer, you can build a brand of who this alcohol is for, what are the types of people who drink this, how is it going to make you feel, you know, what's the brand signal that this beer gives away?

That is literally impossible to do with cannabis producers because it's so regulated. The packaging is, you know, all white labeled by the gov. And so there's a marketing brand recognition cold start problem that I don't see changing at all. And that's, you know, any time there's an important industry or exciting industry, sure, that might be true. But if you have a distribution problem via marketing, how are you ever going to differentiate yourself? I just don't see it happening. I have an idea. ChatGPT meets cannabis. seen chat gpt they reached uh was it they reached the the instagram usage basis in like two months that when they got bought by meta uh no i i mean i've heard numbers that in terms of their reach has been phenomenal compared to the other platforms so i didn't know it was like three months per save but yeah they've had the the user base grown to such a pace that it's been. It's the most successful consumer application of all time.

It's still early innings. You saw that video I sent you though, FinChat. Oh, baby. Yeah, it looks pretty cool. We're going to launch that next week. Get ready to the rise of the robots, people. The rise of the robots. People aren't going to even know how to communicate with each other.

They're just going to be asking chat and GPT for everything. Thanks for listening to the podcast, folks. We really appreciate you coming by. If you haven't subscribed on your podcast player, go ahead and do that. It's like when you subscribe on the podcast player, on your Spotify, on your Apple, on whatever you're on, you press that button. It's like shaking hands of uh companionship simone and i like having a beer sitting down with us for like an hour uh we have to do a meet up again this summer simone we should we should get on that yeah i'm actually after we're done recording i i have a suggestion regarding that but i don't want to mention it on the podcast just yet

because i don't want i want to make sure it works for everyone but um yeah i think that's uh that would be a great thing it was fun to do it last summer and hopefully we can have something again this summer oh you're gonna suggest auto or something aren't you no no no actually not so anyways i'll leave uh you know, tune into next podcast for more information. Not sure which one, but in the next month or so, we'll probably have more details on it. All right. So keep listening and you'll be prepared for the meetup. The meetups are fun. So we'll get that going this summer. Take care. We'll see you in a few days. Bye-bye. 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.