Two Canadian Stocks Facing Tariff Headwinds

[00:00:01] 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 Braden Dennis and Simon Belanger Welcome back to The Canadian Investor Podcast. I'm here with Dan. We are back with our Thursday news and earnings episode and thankfully we have quite a bit to talk about, especially on the Canadian front.

[00:00:26] We have some news. We also have some earnings to report, but we will start with the big IPO at least so far this year that made waves in the US, so the CoreWeave IPO. And for those not familiar with it, CoreWeave is an American cloud computing company that specializes in providing cloud-based GPU infrastructure tailored for AI workloads.

[00:00:52] It was founded as an Ethereum crypto miner back in 2017 and they later leveraged those GPUs to provide cloud computing infrastructure. So if you're familiar with the crypto space and Dan, I know you are a little bit. 2017 there was a lot of hype in the crypto space, especially Ethereum.

[00:01:11] There was a lot of demand for it because there was a lot of altcoins that were being created and that culminated with the end of the bull market in 2017 and a big prolonged bear market that started in 2018. 2018. Now, props to them to shifting the business, but clearly they've shifted from one hype sector or part of the investment sphere to another one now with AI.

[00:01:38] So it's interesting to see that shift. But before I talk about the IPO, how it went, so were you aware of this company or just a little bit, I guess, based on the headlines? I mean, not very much, but I mean, I'm looking at them right now, like in terms of like it says revenue has gone from 15 million in 2022 to like almost 2 billion in 2024. I would imagine that's probably all from the shift, I would imagine.

[00:02:05] I would imagine. I haven't done a deep dive and look, I've not looked at the S1, so all transparency there. But coming back to the IPO and I'll talk a little bit about the revenues and what is not looking great for this company as well. They were originally aiming for a price per share between $47 and $55, but it had to scale it back to 40. Of course, you're not scaling back if there is ample demand for the IPO. So clearly there was not as much demand as they had anticipated.

[00:02:34] It was the largest US tech IPO since 2021. It was definitely a good barometer to see what kind of appetite the markets currently have for these large tech IPOs because there are some other ones that are set to happen in 2025. I think one of them that comes to mind is Klarna, but there's a couple of other ones too. So clearly I'm sure they had an eye on this just to see how it was going. It's definitely not 2021 in terms of hype, that's for sure.

[00:03:03] In 2021 they probably would have kind of smashed that price target and then some. And what we're seeing with the price, it's probably still in price discovery right now. It went down to $37 the second day of training, which had been yesterday, Monday, March 31st. And then today, like you were pointing out to me earlier, the stock is up what, like 20% to like $44 right now? Yeah, it's a pretty big day today.

[00:03:29] But I mean the markets have also been pretty volatile the last few days as well, which is probably going to impact something like this. Whereas today, you know, the NASDAQ's up like 1%, so there seems to be money coming back into these. But this happens most of the time with all IPOs. Yeah, exactly. There's a ton of crazy trading in the first, you know, even couple months. Yeah, a lot of price discovery happening. And obviously the market's being volatile just like the president of the United States.

[00:03:59] So it's definitely a headline driven market a lot this year. The market seems to be just moving based on, you know, what Trump is saying for the most part. Some other things, obviously, there's some big macro numbers coming out. But again, it's just a flip-flopping, especially on trade with the Trump administration down south.

[00:04:21] Now, there are several issues with this company, including, and yes, this is the correct number, 62% of its revenues coming from Microsoft. A little bit concentrated? A little bit, a little bit concentrated. I think the top two is 77%, if I remember correctly. They had a net loss of $863 million last year and burned a whopping $5.9 billion in free cash flow on revenues of $1.9 billion.

[00:04:47] So yes, they have seen some nice revenue growth here. So it's nothing to sneeze at. I'll be very, I'll agree with that. The revenue has been going up very nicely. But the reality is they are burning a whole lot of money. And it makes sense now that they would want IPO, probably want to get a little bit of cash into the company. Now, that was in large parts, of course, last year.

[00:05:14] They had a lot of capital expenditure because they had to purchase a lot of NVIDIA GPUs. It's also worth noting that NVIDIA owns shares of the company and invested an additional $250 million as part of the IPO. I think prior to this investment, they had about 3% shares in the company. So it'll be obviously higher once that's factored in.

[00:05:36] The company has a lot of debt, including an $8 billion loan secured against NVIDIA GPUs, which is really weird that you'd have a loan secured against GPUs. Because obviously, if you're familiar with computer chips, whether it's GPUs, CPUs, other types of chips, it's not like they hold their value extremely well over a long period of times.

[00:05:57] And I have a feeling that this loan was provided with the NVIDIA GPUs backing it, mostly because they're selling like hotcakes right now. And I'm not sure who I'll have to look who provided the loan. But to me, that's not the best idea to back these loans with GPUs. But that's just me.

[00:06:18] And like you said, I mean, for me, the rule of thumb with IPOs is just to wait and see, especially even if you're interested in this type of business. Give it a few quarters. Usually you can see how the company reacts to being publicly traded, which is very different than the private markets.

[00:06:35] But specifically to them, I mean, I just don't know if this is a great business model as essentially infrastructure as a service, because clearly Microsoft is a big customer because they're likely doing this while they're building out their own infrastructure.

[00:06:54] So I'm assuming and that's an educated guess, but I think it's probably pretty accurate is this is a stopgap for Microsoft while they purchase more and more GPUs and build out their own infrastructure. So when they do and they no longer need this company, what will happen afterwards? I just don't know. Or maybe they still need them.

[00:07:16] But instead of having the same commitment as they do, they start reducing their orders by a 50 percent magnitude or whatever it is. So it could really impact their revenues, especially when Microsoft is more than half of their revenues currently. Yeah, I mean, it seems like there's a lot of kind of capital flows into this business with like no barrier to entry, I guess. I mean, I might be completely wrong on that. I don't really know the company all that well.

[00:07:43] But like you said, this just kind of seems like a bit of a stopgap. So I and tell these companies which I mean, you're messing around with big tech who has cash flow to burn on stuff like this. So the the secured loans is is crazy to me against those GPUs like I I bought like one of the top end GPUs for my computer probably like four years ago. And it's like worth nothing today. It's not exactly.

[00:08:10] It's like barely meets minimum specs for a lot of stuff now. So that's that one is a bit odd to me. Yeah. And the last thing I would say is just Nvidia investing that heavily in them is also a little strange because clearly. This is one of Nvidia's probably larger customers because they're by they're getting the GPU somehow like they're buying it from Nvidia.

[00:08:34] So it's kind of weird that Nvidia would have a relatively big position in this company like single digits is still pretty big. So there's just a lot of weird stuff happening with this company. It'll be interesting to see how it progresses as it matures a little bit more. Let's say between now and the end of the year. Yeah, I mean for these IPOs the vast majority of them you're gonna probably lose money over the long run.

[00:09:03] I mean I used to mess around with a lot of these back in the day, but I really don't buy them anymore. I mean probably the last one I bought was probably tell us international and I got burnt huge with that one. That was a complete dud and it was I believe it was actually the largest tech IPO in Canadian history. It was a pretty big notable company profitable cash flows, but I bought a lot of IPOs and I've rarely ever made money on any of them.

[00:09:29] So especially like right away, you know what I mean? Like yeah, you kind of have to wait it out and see how this company does over the long term. And then you know because a lot of these are priced so expensive, especially like you said during 2021 2022 was crazy. Yeah, I mean a lot of it is all is all hype for the most part. No exactly. So that's the news behind that. So we'll move on here keep go back to the Canadian content get the US content out of the way.

[00:09:59] So you want to tell us about well health company that you own right if I remember correctly. Yes, owner. Yeah, I've owned it for for quite a while. It's it this was kind of frustrating to me. I mean very frustrating to say that. Okay, semi semi proud owner. Yes, I was a proud owner up until yesterday, but this kind of it made me angry, but okay.

[00:10:22] They're a small cap healthcare company and it's in a bit of PR trouble due to a subsidiary it owns in the US. So circle medical which would have been the subsidiary it owns they acquired it. I believe it was in 2022 or 2023. They're a majority shareholder. I don't believe they own the entire company, but they are majority shareholder. They were asked to voluntarily provide some documents related to its billing practices back in 2024.

[00:10:51] So it didn't do so. And then it got into some difficulty from regulators in California. So the company had until March 31st to provide particular documents and well health released today that it won't be able to do so. So this all kind of seems, you know, all right, but the difficulty here is well health made no indication that this was even going on despite it starting, you know, six months ago.

[00:11:18] So there was no indication that circle medical was, you know, this issue was going on because initially back in September, it was a voluntary disclosure of the documents. Uh, they just had to provide it. It wasn't like a forced thing, but now it's, you know, they had to provide these documents by March 31st and they missed it. And I don't know. This kind of gives me the impression that, you know, well health maybe thought that this issue would be resolved.

[00:11:43] So maybe they never needed to mention it, but I mean, I like this probably needed to be disclosed six months ago and it wasn't, which kind of leads me to believe, you know, where there's smoke, there's probably fire. Uh, if circle medical really wasn't, if they weren't doing something, they shouldn't be, it would be, you know, fairly easy for them to just submit the documents. And now that they've missed the deadline, it makes it look even, you know, even worse.

[00:12:09] And the issue here now is because circle medical missed this deadline and it's a effectively a majority owned subsidiary. Well, health can't report earnings. So they were supposed to report earnings. It would have been sometime this week and they can't report now. And obviously when a company is unable to file earnings, investors get spooked, zero doubt. Uh, the stock fell around 20% on the news. And at one point it was down over 30%.

[00:12:35] And it looks like they've asked for a few more weeks to get the documents in. Like I saw some mentions of an April 15th deadline. So clearly, um, they want to get a resolve so they can release earnings. And I mean, you could call this an overreaction based clearly on circle medicals impacts. It really, it only accounts for, you know, high single digit portions of revenue and EBITDA for well health. But I think the main issue here is just the element of trust in management.

[00:13:04] I mean, the fact they did not disclose this was an issue six months ago. Um, again, it's that smoke where there's fire situation. If, if they're, and I'm not saying well health is doing anything outside of this, but I mean, there's obviously going to be a lot of investors who at this point in time are going to be well, if they hit this, what else are they hiding? And I think that's kind of why you're seeing the huge sell-off.

[00:13:28] And, uh, the other thing I did want to mention, because a lot of people were kind of spooked out by some headlines in terms of a cease trade order. It was a management cease trade order only. So effectively what they do here is they look to make it so that management can't trade shares. So this would be done for a few reasons. For one, you know, it makes it so management can't really take advantage of the price action.

[00:13:51] So for example, if this was all going to be a pretty big misunderstanding, management could effectively buy shares into a 20% drop and take advantage of that. And on the flip side, if this was bigger news than being reported, they could kind of front run that information and sell. So that's what the cease trade order is. It's not effective. They're not looking to like stop the trading of well health. Although people were kind of saying that that's what it meant.

[00:14:15] I mean, I wasn't really looking anywhere reasonable like the, you know, Yahoo finance comments, all that type of stuff we're saying, you know, the stock was going to stop trading. Yeah. Those are always good. Yeah. That's a rabbit hole. I check those comments when I, I want a good laugh. Yeah. Oh, exactly. Whenever there's something like this, I always drop to those comments. And yeah, people are saying like they're filing to have the stock stop trading and stuff like that. That's not the case.

[00:14:41] Although realistically of well health couldn't file earnings, you could get into a situation where it might be halted until it does. I don't think that's going to be the case, but I mean, as a shareholder, as I've mentioned numerous times, I mean, this kind of aggravates the hell out of me. I mean, the damage that is probably going to be caused by not disclosing this information on, you know, something that makes up 10% of your overall business is just kind of mind boggling. I mean, why do it?

[00:15:08] If they announced this back in 2024, you probably would have seen a bit of a dip in the share price, but at least it's publicly available information that you've disclosed when the issues are happening. And you're not announcing it when you have to delay your financials because you're not going to get the documents in on time. So it looks really bad. And I mean, yeah, it's just a, it's an ugly situation. And I mean, the stock's taking a bit of dive, a bit of a dive.

[00:15:33] And I mean, I'm just kind of hoping right now that they get it sorted file earnings. And then you'll probably hear about this a lot in the MD&A when they file probably six months too late, but they'll probably discuss it now. Yeah, no, that's a good overview. And I think it's important for me. I don't trust management anymore. I don't care how much I like the company. If the management team has lost my trust, I will typically just sell. That's the way I approach things. People, they don't have to do that.

[00:16:03] Obviously, I'm not saying you're going to sell or anything like that, but that's how I approach things. It happens to me a few times where I just could not trust the management team anymore. And I just decided to sell my shares. Yeah, and I mean, there's going to be a lot of indication as to what's going on in the next couple of weeks. I mean, I would imagine maybe they'll look to even move on from Circle Medical period. That depends on how deep this runs.

[00:16:29] But it just kind of gives me the impression that they didn't want to mention it because they probably thought it would be resolved by now. And then all of a sudden, it wasn't resolved a day before the deadline. And then they got to release all of this at once. And then they kind of released a few other documents. I mean, they made an acquisition that they talk about. And then they released their patient care growth, which was pretty solid. Like they kind of went out with the prelim results, probably because they had planned to report earnings.

[00:16:59] And they couldn't because of this. So they kind of released those prelim results. So there's an element there where a lot of people are saying, oh, they're trying to release this type of stuff to deter people from paying attention to what's going on. Which I think is true in some regard. But yeah, it's... Okay. No, that's a good overview. Yeah. I think we'll have to keep an eye on it and revisit when they do release their earnings. Yeah, exactly. That'll give us a bigger picture. So let's move on.

[00:17:26] We have a couple more companies we want to talk about. The next one is Lululemon. So they released their Q4 2024 earnings. Now, full disclosure, I actually sold my Lululemon shares about a month ago. I posted on our most recent joint TCI update, which we posted yesterday for the month of March. The reason... And I'll go over the reasons I sold.

[00:17:51] But clearly, with the result that came out, I was definitely happy that I sold about a month ago because the market did not love the results from Lululemon. The stock was down 14% when the earnings came out. So Q4 net revenue increased 13% to $3.6 billion. That was higher than what they were guiding for that quarter at the end of Q3. So it definitely exceeded their guidance.

[00:18:17] U.S. revenues were up 5%, Canada 11%, and mainland China was up 47%. Net income was also up 12%. Gross margins and operating margins did very well. They increased 140 basis points respectively. And for the full year, they generated $1.6 billion worth of free cash flow, which was slightly lower than the prior year, but still very respectable.

[00:18:43] They repurchased $332 million in stock in Q4 and $1.6 billion for the whole year. One of the recent issues facing Lululemon was their product assortment. So I did talk about that the last time we covered their earnings release. Yeah, I guess three months ago. They have been mentioning this for several quarters, and it sounds like things are starting to turn around on that front with a better product mix, which has been receiving positive feedback from their customers.

[00:19:12] So that is definitely on the positive side. On the call, they mentioned that the low-hanging fruit for growth for them is essentially increasing brand awareness, which they say remains very low in several key Asian markets. But even in the U.S., they were mentioning, I think, about 30% brand awareness in the U.S., which is surprising. I thought it would have been higher.

[00:19:34] Yeah, it seems low, but I guess it may be overall, maybe some markets is higher than others in the U.S., like some specific markets, depending whether you're in a larger city or not. I guess east, west, south, and kind of mid-west America, depending, I guess, where you are, the awareness probably varies. They also conducted a survey with Ipsos, which showed that U.S. consumers are spending less because of concerns. You want to guess?

[00:20:02] About inflation and the economy. Surprise, supplies. And this has resulted in slower traffic across their U.S. stores so far in 2025. And it's looking more and more like U.S. sales will be a challenge, at least in the short term. And this is what I think the markets were not loving.

[00:20:22] First of all, they also mentioned that they are seeing headwinds because of tariffs and foreign currency exchange, which will put some downward pressure on margins this year. The guidance was really, really not great. It came in lower than what the markets were expecting. They expect revenue to grow between 5% and 7% and EPS to grow between 2% and 3% compared to last year. So the guidance is really what I think surprised markets.

[00:20:50] I think markets were expecting a bit more in the high single digits in terms of guidance. And clearly the U.S. is not doing all that well. That's the other reason. And for our joint TCI subscribers here, you'll see on the graphic I'm showing the U.S. specific revenue. And you can really see, for those that are just listening, starting in 2023 up until pretty much now, we can see sales have almost like plateaued.

[00:21:19] Yes, there's been a small increase for the Christmas quarter if you compare it this year to last year. But it's not a massive increase. And for pretty much all of the other quarters last year was flat year over year. And this is not great when you're talking about your biggest market. Yeah.

[00:21:37] And it's also like from a valuation perspective, I mean, Lululemon is still relatively expensive, especially when, you know, with the guidance, you know, mid-single-digit revenue and, you know, lower, low-single-digit earnings. I mean, it's obviously, you know, a bit of a company that's struggling right now due to just the overall economy. And I would imagine the bulk of Lululemon's clothing is produced outside of the United States, I would say.

[00:22:07] Yeah. So they're probably particularly prone to tariff impacts. But yeah, it's, I mean, it's interesting with Lululemon. I mean, they've effectively had, you know, dead returns since like the start of the pandemic. Now it's looking like just because of the huge drawdown it's had since the 2023 peaks. Yeah. And the valuation look for on a P basis, it's looking decent at 19.

[00:22:32] And at this point, because the growth is very, very low, especially on the earnings side, you can use the trailing 12 months if you want or the forward, it should yield you similar results. So it's trading on the trailing P about 19. That tends to be as on the low end for them. But typically when it traded that low in past years, they actually had some growth ahead, a bit stronger growth than they have right now.

[00:22:58] So on that front, it's probably trading at a bit more expenses. I haven't checked on the price to free cash flow. I'm just going to pull that up. So same thing for the price on free cash flow. It is getting a little more attractive, I would say. But again, it's hard to, it's in the low 20s. So it is still on the cheaper side. But again, is the free cash flow going to grow all that much? That's the other reason.

[00:23:24] So it is a company that I still like a lot of Lululemon. But for me, it just made sense to sell it. I did it kind of in two tranches late in 2024 when they had their Q3 quarter and the stock really popped on earnings. So I took off, sold half my position, and then I sold the rest, the remaining half early in March, mainly for a couple of reasons. I wasn't a fan of seeing what was happening with the US sales.

[00:23:53] That was one of the big things as being their biggest market. And then the potential impact for tariffs was really what was concerning me, especially at that point. If we go backwards a month, Trump was really starting to flip flop on tariffs, creating that uncertainty seem serious at times, not serious at times as well. So I just decided, you know what? I think there's a better time to hold this company as an investment.

[00:24:21] There's probably going to be some tough times ahead for the next year or two. And look, I didn't know that their guidance would come in that low. And they have factored in some lower margins. I think they factored in a hit to margins because of the headwinds they're facing. I didn't know that it would be that meaningful. But clearly, it was a good decision. Had I known, I probably would have sold it all back in December.

[00:24:48] But again, I was trying to hedge a little bit there and just sell a portion of it and just see how things would go. And I just wasn't a fan on the more the macro end. And I thought it could have an impact on Lululemon. And it looks like I was correct in my assessment. Yeah. And who knows when the environment is going to improve. I mean, retailers are, especially like fashion retailers, are tough right now. I mean, you look at Nike, you look at Lululemon.

[00:25:15] I'm really interested on the Canadian end, how a company like Aritzia does. I mean, they've definitely drawn down in price quite a bit. Well, not quite a bit. They've drawn down. I think they were almost $74 a share. And they've dropped down to $50 just in the last month and a half here. So, I mean, if you own these retailers, particularly clothing retailers, I mean, it is always a roller coaster. It's almost a guarantee. And I mean, Lululemon's just kind of going through it right now.

[00:25:46] Yeah. Yeah. Aritzia, I'm pretty much in like 30% drawdown in the last three months. So, I mean, it's hard. Even if they come out with fantastic results, like it's not surprising that the stock has seen a pullback. First of all, it had a great run. And second, you're seeing all these other fashion brands that are struggling and they're saying tariffs will have an impact. Clearly, investors are looking at Aritzia and saying, okay, well, you're probably going to see some kind of impact.

[00:26:15] We don't really know how bad it's going to be, but we definitely think there's going to be an impact. So, I can see why the market is pulling it down, even if they end up coming out with really good guidance and minimal impact to their margins. Yeah. And I mean, Aritzia was kind of going through a bit of a different element in 2024, just in terms of margin recovery and like inventory. They were going through in 2024 what Nike is kind of going through right now.

[00:26:44] Like inventory levels are an issue. They're having to do a ton of markdowns, things like that. So, depends. I mean, does Aritzia get into trouble again? I mean, it's difficult to say. I would say if they come out with earnings that, you know, the guidance is all right and they can kind of see that it's not being impacted as much. I mean, I think you could see, you know, the price start to trend upwards again. But I also can't see how a company like Aritzia could avoid anything that's going on right now. Like, just depends if it's priced in or not right now.

[00:27:14] That's difficult to say. Yeah. No, that's a good point. So, we'll move on to another company that seems to be having some fun with tariffs. So, do you want to talk about BRP? I don't know if it's just tariffs or more the economic cycle. So, we have BRP, the makers of Ski-Doo's, Sea-Doo's and all that stuff. So, I'll be listening closely because it's one that I've been keeping an eye on. I just haven't had the chance to fully review their latest quarter.

[00:27:44] But it's been a tough couple years. I would say like a year and a half, two years for BRP. Yeah. I said fashion retailers are tough holds over the last while. I mean, this one, because I own this one too. I've owned it for quite a while. Recreational vehicle companies are probably even harder. I mean, quarterly results from BRP, they're relatively ugly this quarter. I mean, they've been ugly for quite a while.

[00:28:12] But in terms of expectations, they did top on both revenue and earnings. So, I mean, the bad is projected into a lot of this. They didn't beat by anything crazy, but they did beat. So, the stock did pop a bit after earnings. But it seems to move every single day depending on tariff news, depending on any sort of economic news that shows any sort of weakness. It just bombs. Any sort of news that shows any sort of promise, it pops.

[00:28:39] But year-over-year revenue declined by 20% while earnings declined by over 65%. So, gross margins are continuing to take a hit as well. They came in at 20.5% versus 25.3% last year. So, margins are taking a bit of a hit, like the same situation as many of those retailers. Like they're having to mark down a ton of product to clear out inventory. So, BRP has been kind of working to try and reduce dealership inventory for the better

[00:29:09] part of like a year and a half now because there's just no demand for it. The products just aren't selling. Interest rates are higher. You can imagine how difficult. Not only would it be difficult from like a consumer's perspective just because of the overall cost of living, but then you have, you know, financing rates like would be so expensive, especially in the United States to finance one of these vehicles. So, dealership inventory eventually kept stacking up, stacking up.

[00:29:36] Now, they're having to mark down a bunch of product as well as some input costs. Those margins, it's not looking good. So, for those that are not on joint TCI, so what I'm showing here is the gross margins, operating margins, and net profit margins. Just to give you, give people an idea, so I'm doing it on a yearly basis. You're looking at steady margin, actually trending up in 21, 22, where you had the pandemic craze

[00:30:03] where everyone who had a cottage was buying 3, 4 ski dues or sea dues, whatever it is. And then you had a bit of a dip in the margins in 23, 24. And then it's looking like it's really, really going down ever since. So, you went from, just to give an idea here, if I take the operating margins, which is the ones I usually like the most,

[00:30:28] you went from around 14% roughly up and down, give or take 100 basis points over the last 3, 4 years. And then you went all the way down to 8.1% for operating margins. So, you're talking about slash and half almost here. Which, I mean, the thing about it is, that's a pretty typical operating margin from BRP. I mean, it definitely spiked during the COVID environment. Like, probably an environment we're not going to see again. Hopefully not, obviously.

[00:30:57] But yeah, they're taking a big hit. And again, on that gross margin end, which is ultimately going to hit profitability quite big as well. It's mostly due to just stocked up inventory for the most part. And I mean, when we looked at their year-round products, which contributes to 54% of revenue, they saw sales dip by 17-ish percent. Seasonal, which makes up 32% of revenue. That declined by 28.6%.

[00:31:23] And their parts and accessories, which make up the rest, they're effectively flat. Which, I mean, makes sense in a way. I mean, people are still going to have to maintain the ones they own, things like that. It's probably not going to get hit as much. And again, as I mentioned, the company's attempts to reduce dealership volumes are showing some progress with inventory levels. They're down around 13% over the last year. And another thing they managed to do was reduce operating expenses by about 3.4% year over year.

[00:31:51] So this is pretty much due to declines in general sales expenses and research and development. I mean, this makes sense. When you're selling less, you're probably going to market less. I would imagine the company is getting probably very little return on its marketing spend right now, just because it's just not an environment to purchase these vehicles. I mean, did they even need to market during the pandemic?

[00:32:14] It's like if you have some on hand, so I think people were selling those used for more than the new ones for a period of time. Well, it was kind of the same as Tesla's. Like inventory was so low that people were like buying them and flipping them for profits. I mean, it was pretty crazy. The thing with BRP is it's such a dominant player. Like it holds so much market share for pretty much every product it sells that, you know, the marketing kind of operates itself.

[00:32:43] But again, it's like it's scaling this stuff back because it's just going to be, I don't want to say a waste of money, but probably not the best spend. Right now, they're probably in full-blown balance sheet preservation, I would say. I know they did mention something about a share buyback that like they renewed a share buyback, but they're actually not, they don't expect to actually buy back a ton of shares just because they need to preserve capital, which is a good thing.

[00:33:10] I mean, you can run into a lot of issues if the environment gets worse and, you know, sure, the shares are cheap right now, but if they blow all their money in it and it stays poor for a while, then you're in a situation I got to give right off the top of my head would have been Suncor. Like in 2020, they spent all their money on share buybacks and then the pandemic hit and they had to pretty much instantly cut the dividend. So you definitely want to avoid a situation like that. But I mean, overall for BRP, it's just ugly year, but largely an expected ugly year.

[00:33:40] Yeah, a couple of comments on that too. So for those looking at the company, this is one that is counterintuitive if you're looking at traditional valuation metrics. So it may look super expensive on a PE. I have it around on a trailing 12 months PE around 58. Yeah. The reason, do I have the trailing? Anyways, whichever one I have. So the reason is that the earnings have dropped faster than the stock price. And some people may wonder why the PE is so high.

[00:34:10] Well, that's the reason. And typically, these are the kind of companies, assuming that you're dealing with quality and, you know, BRP better than I do. But everything I've read is they're definitely a good company in this space or one of the better ones, if not the best. Well, if they can make it out of the slow cycle, that's usually when you want to buy these companies when the PE is going to be looking very high. It's just because the earnings are dropping faster than the stock price.

[00:34:37] And that's why the PE looks more expensive versus if the PE looks low, then it's usually the opposite. It's earnings have actually grown faster than the actual stock price. And then the PE may look low, but it also assumes that it will continue in the future. Yeah, because the market effectively knows, like they would have known during the pandemic, you know, when BRP was reporting massive earnings that they aren't sustainable. And obviously, we look to forward valuation.

[00:35:05] So, you know, when BRP was earning $13 a share and trading at $100 a share, that's primarily because the market knows that they're not going to earn $13 a share and growing in the future. There's going to be some sort of down cycle. So, you get a low PE, whereas, you know, in this case, the market probably knows that BRP is not going to have this soft of earnings indefinitely in the future. So, you get a little bit higher of a stock price relative to earnings.

[00:35:33] So, you get a high PE ratio, which is like it's never like it's counterintuitive. It's counterintuitive. Yeah, you want to buy. And obviously, this is just a very broad generalization about cyclical stocks. Like it doesn't always work, but generally, they're cheaper when the PE is high, if that makes any sense. And then when the PE is low, you know, the market is probably pricing in a little bit of a decline in earnings moving forward. So, the PE ends up being low.

[00:36:01] And ultimately, like that's when they're most expensive. Yeah. And the last thing I'll mention here is on the share buyback front. I don't love when companies do this because, look, this management team, I have no reason to think they're not a good management team. But buying back shares of a cyclical company when things are going fantastic is probably not the best use of capital. I'm just going to throw it out there.

[00:36:27] So, if they had managed that better and just said, you know what, we'll give a special dividend to shareholders. We'll actually shore up our balance sheet. We'll pay down debt a bit more. But we actually won't buy back all that much stock because things are going great. But we also are in a cyclical business. And at some point, the cycle will be on the downside and our stock price will be much, much lower.

[00:36:55] And at which point, we'll go ahead and buy back shares. But unfortunately, not many companies think like this. And obviously, hindsight is 20-20. But you're looking back here at the share buybacks. And they were doing, you know, in 22, they were doing $682 million, $305 million in 23, $446 million in 24.

[00:37:17] You can make a case that they could have gotten a lot better value with those buybacks as they just shored up their balance sheet and then have more leeway to be doing buybacks now that the stock price is down by more than half. Yeah, they were generating, obviously, like a ton of money during like 2022. Like free cash flow just went through the roof effectively. And I mean, maybe they didn't really know where to spend it.

[00:37:46] So they bought back a bunch of shares. But you can't look at this and tell me it's good capital allocation. No. I mean, in hindsight, it's terrible. Yeah. I mean, they spent almost $700 million in January 2022. And what is their share price down since January 2022? I'm going to bet a lot. Yeah. Yeah, it's down a lot. A lot. No, I just want to make a point. And I have put my money where my mouth is for this kind of stuff.

[00:38:12] So I tolerated, to lack of better words, Canadian National Oil, essentially doing the same kind of thing. And I just recently, a couple weeks ago, I ended up selling my position because I just thought it was some really bad capital allocation. They could have used it to shore down the balance sheet in case of worse times. But they insisted on buying back shares, actually buying by more shares than the free cash flow they generated,

[00:38:41] which is really what pissed me off and why I decided to sell those shares. And I'm looking to buy CP as I see some good entry points. But sorry, I went on a little bit of a rant here. But it frustrates me when I see companies do this kind of stuff where you're clearly in a cyclical type of business. Can you not understand that this is probably not the best time to be buying your shares? And there's other ways you can return capital to shareholders.

[00:39:09] And if you thought more long term, you'd be making better decisions. But anyways, anything else to add here? We're going to give our disclaimer before the next segment. Oh, yeah. No, I'll just say I did the exact same thing with CN. I didn't really like that. I swapped CN for CP quite a while ago. I just view it's kind of the better operator at this point in time. Yeah. And yeah. But no, that's it. Go on with the disclaimer. Okay, disclaimer.

[00:39:34] So we will be talking about a little bit of politics here just because what we'll try to do on the podcast is bring up some policies that are announced during the campaign that touch investors, whether it's self-directed investors or potentially investments. If you own a business and you sell the capital gains and so on. I'm realizing that, yes, there have been some announcement regarding that. So I'll probably try to do a segment regarding that specifically.

[00:40:04] We'll try to be balanced as best as we can for both parties, both major parties, realizing there are more than two parties in Canada. But let's be honest, there's really either the liberals or conservatives that have a chance to foreign government. The rest, I think, don't really have much of a chance. So if you didn't want to hear about this, then this is your chance to switch to another podcast. But the conservatives, I'm sure you've seen it, Dan.

[00:40:31] They announced a new TFSA top up if they were to become the next government after the April 28th election. So the current $7,000 a year wouldn't be unchanged. You can contribute an additional $5,000 for investment in Canadian companies.

[00:40:49] And a conservative government would create a definition that would let financial institution and advisors tell you which investment can go into your TFSA top Canada TFSA top up or not. So I have some questions about this. Anything you want to mention before I get going or your... No, I mean, I'll have lots of comments when you go through all of this. So I'll just let you start.

[00:41:14] So yeah, so the first two things that came to mind when I saw this is first, how is it going to be administered? And then what type of investments or Canadian companies will be allowed under this new definition? So on the administration side, I actually thought about it quite a bit because I'm like, how the hell would they create this without creating an administrative nightmare for financial institution, individuals, the CRA, for example?

[00:41:41] And the only way that I think it would make sense is essentially anyone can create an account, regardless if you've reached your contribution limit with your regular TFSA or not. It keeps the administration on the contribution side minimal, probably would just be similar to how a TFSA is administered currently. But obviously as a standalone account. So it would be a standalone account.

[00:42:09] That's the way at least I would envision it, the way they would create it. And this is not the conservatives here announcing this. This is just me thinking how this could be created without creating too much of a red tape and administrative mess. So as a standalone account, it would essentially make no sense to create this account if you don't have your TFSA room maxed out. Because why would you create this account that has more restrictions than a regular TFSA if you don't have your TFSA maxed out?

[00:42:39] Of course, I'm sure there's going to be people if they would go with this approach that would create this account not knowing which is which. So they would create the wrong account. That would obviously happen. But at the end of the day, people are adults and they can make their own decision. And I'll talk about the type of investment in a second. And I found data dating back five years that only about 10% of Canadians with the TFSA had maxed out their contributions.

[00:43:07] So it was roughly 1.5 million back then. So let's say it's closer to 2 million now. It's not nothing, but it also doesn't impact most Canadians who are just struggling to make ends meet right now. That probably don't have that much money to put in the TFSA. So from that standpoint, it's probably something that's targeting a bit older generations. Probably more Gen X and millennials because...

[00:43:33] Sorry, Gen X and baby boomers because millennials and Gen Z will likely have sufficient room in the regular TFSA. They're not in the period of their life that they're probably maxing that out. So that's probably who they're targeting with that. Before I continue, any comments there? Before I switch over to the type of investment? No, yeah. I was thinking the exact same thing as... Like it would probably be... You can imagine how hard this would be to manage if it was just one account.

[00:44:01] Like if you just had the TFSA and then... Like how do they track that? Whereas if they made it a separate account, I mean, it's probably pretty easily trackable. Either it's flagged when there's outside investments in there allowed or maybe they're just not even allowed to be purchased. I would imagine brokerages can maybe stop it from being purchased. I mean, it's less of a...

[00:44:27] Initially, when they released this, I was like, I have absolutely no idea how they're actually going to monitor whether this is done properly. But a separate account, it makes a lot of sense. It's the only thing that would make sense. Yeah, it's the only thing that would make sense in my view without creating so much more complexity behind it. But the bigger question is when it comes to the type of investment. Yeah. Because they were very ambiguous about that.

[00:44:52] And that's the big issue I have here is they mentioned the definition would be based on the fact that companies that hire Canadian workers and create Canadian jobs. So clearly, they're playing on the Canadian part of it, being on Team Canada and all that. And both parties are milking that to the max. So I'm not trying to put that on the Conservatives or the Liberals. They're both doing it. And that's fine in itself. But where do you draw the line?

[00:45:21] Where's the threshold? It's inevitably going to create some winners and losers here. And I'll be honest, I'm not a fan of governments picking winners and losers when it comes to investments. Because there's tons of companies that are listed in Canada that have very little to no operations. I mean, the venture is filled with these companies that are just listed in Canada but have zero operations in Canada.

[00:45:44] And you can look at some very large companies that are well known that have minimal operations in Canada too. What do you would do with a company like Lululemon's? That's listed in the US but probably has a decent amount of jobs created in Canada. So there's all these different kinds of questions that is really hard to give.

[00:46:04] And they said they would give a definition and then the financial institutions or brokers or financial advisors would provide a list based on the government's definition. Which is, is it going to be different from broker to broker? Like, these are all the questions that to me, there's just more questions than answers when it comes to the announcement. And someone on my, when I posted about that, he said, like, what about ETFs? And that's a great question. What about ETFs?

[00:46:34] Like, is there, do you, are they eligible if they don't have specific companies in it? Like, how do you determine whether it's eligible or not? I have no idea. Look, and at the end of the day, the idea behind the announcement, I think it's to encourage more investment. But I did some research on this and higher stock prices don't necessarily mean that companies will do more investment. There's not really any conclusive evidence of this.

[00:47:03] Sometimes it means they will, sometimes they won't. For example, oil and gas, when you get really high stock prices, it's usually because the price of oil is high. And then that encourages companies to invest more because they want to capitalize on it. But it's not a guarantee for all these sectors. And at the end of the day, it will just drive up demand for the Canadian stocks that meet this criteria. The stock price will be higher with all else being equal.

[00:47:32] But it's not necessarily going to lead to more investments in Canada. And that's why I have a bit of a problem here. I understand the intent behind it, but I don't think this is the best idea personally. But, you know, feel free to add me on Twitter or whatever if you don't agree with that. But there's just a lot of questions around it. I don't know what your first impressions were.

[00:47:55] Well, I mean, realistically, like if you think of most of the best Canadian performing stocks, like just TSX listed stocks, there'll be companies that really don't have very much operation here in Canada. Yeah. Like they, so if you kind of, you know, focus this in... So do you remove them? Right. Yeah, that's what I mean. So, I mean, one off the top of my head I can think of is Waste Connections,

[00:48:22] which is, you know, it's a TSX listed, you know, waste management company. It's not waste management, it's Waste Connections. But I mean, they're primarily a US operator. They do have some Canadian operations or Canadian traded like stock. So at what, where do you draw the line? And then like, I just don't know if you're kind of isolating it to Canadian companies where most all of their operations are here in Canada.

[00:48:49] Like, are people even going to find that attractive? Or are they going to, you know, say, screw it, I'll put it in a taxable account and buy the S&P 500 over, you know, an isolated batch of like Canadian economy exclusive stocks? Because, I mean, like I own quite a few Canadian traded tickers, but the only company I can think of that would have like huge exposure in Canada would be Telus. Like everything else is...

[00:49:18] Like I talked to you about Boyd, like the auto body and glass company I own. Like they're like, they're a Canadian traded stock, but they're like 92% of their operations are in the United States, not in Canada. So like where the one question I'm really curious about is like, where is the line drawn? Exactly. You know, that's the same question I have is where, where do you draw the line? How do you not end up having a government that creates winner and losers here? Like that's essentially what's going to happen.

[00:49:47] And I'm personally not a fan of that. I would prefer that. And there are some initiatives from both parties that will probably encourage investments in Canada. But I think that's what you need to do is really make Canada friendlier place to invest in. And capital will go where it's treated the best. And especially when we look at the US and what's happening with the orange man.

[00:50:12] I mean, a lot of companies are probably reluctant to invest in the US, even if it's their bigger market, because there's been so much change. So much is changing quickly that I think some companies may be a bit fearful of even investing in the US. And if we can create an environment where Canada is actually a pretty good alternative to investing in the US, it's more stable. There's more clear rules.

[00:50:39] I mean, I saw the US is even like renouncing the US government on certain contracts that it had with, with publicly traded companies, some well-known ones. One of the big reasons why the US is such a great and popular place to invest in is that the rule of law is respected. But we're seeing that more and more in the US where that can come into question if you're a business, right? So even if you want to invest in the US, you may get scared because you're like, you know what?

[00:51:08] But I'm scared that the contract we have may not be honored. So I think there's definitely some low-hanging fruits for Canada to capture. And we'll have to see. Like, I'm sure there's going to be a bunch of announcement on policies coming up, leading up probably in the next couple of weeks leading up to the debate. It'll be interesting to see. I'm not quite sure that this is going to really move the needle. And aside from just creating a whole lot of complexity and propping up some Canadian stocks.

[00:51:39] Yeah, especially, I mean, when you think about it, it's mostly the older demographic they're appealing to. Because I just don't think many of the younger generation are worried whatsoever about maximizing their TFSA. They're more so worried about, I mean, just all of the other costs of living. But I mean, the one thing I want to go back to is the ETF front. Like, if you look at, like, how do they judge that? Like, if you look at XIU, which is the TSX 60 ETF, I mean, you have Shopify, which is like US.

[00:52:07] Well, they're global, but a ton of US. You have Brookfield. You have Bank of Montreal, which is huge US presence. Constellation software, like very little, you know, mostly international. I mean, what else? Waste connections, like I said. It's funny. Constellation, Braden tweeted, like, oh, I'm just going to buy Constellation. I'm like, well, if they allow it. If they allow it. Yeah, because like Alimentation Custard, like over half of their operations are in the United States.

[00:52:35] Like, in terms of ETFs, like, are you like kind of pushing people to? Yeah, effectively what you said, they're going to push people to invest in a very, well, depending on how tight their criteria is, like a very tight subset of stocks. Like, right off the top of my head, I could think of like, I mean, maybe like a national bank because they're almost all Canadian, but like grocers, grocery companies, telecoms, pipelines, I guess, oil producers. It's a very tight. Yeah, oil producers.

[00:53:03] It's a very small allocation of Canadian listed equities that are focused solely on Canada. Or maybe they end up having some ETF providers creating some specific ETFs that are made based on the definition for this account. That could be another option. That's possible. I mean, I think it's a good idea. I don't want to think that I'm trashing on the idea. I think it is a good idea, but it's just hard.

[00:53:30] It's just how they implement it is kind of hard to fathom right now. Yeah, I think in theory, it might be a good idea. In practice, I don't think it's a good idea. That's my kind of thing is just there's so many questions that come up. And even in theory, it's just I don't like the government saying you can invest in company A versus company B. Where's the threshold? There's just, yeah, I'm not a fan of that.

[00:53:57] I would rather that people can invest wherever they want and see fit. And we make Canada just a more attractive place to invest in. That's my view on it. But I think, I don't know. I feel like we've talked enough. I'm sure we'll get some angry comments of people thinking it's a great idea. And that's fine. You don't have to agree with me. That's completely fine. It's just for me, I go on just thinking about how this would be implemented and the effects.

[00:54:23] And I have a hard time seeing that it would be all that meaningful. That's just my view here. Yeah. Yeah, I would find like in the case the restrictions are too restrictive, then it's probably not optimal. And if in the case where the restrictions weren't all that restrictive, like I know personally, if to say they open this up to just like Canadian domiciled stocks, all of the companies that I would buy with that money would have very little operation here in Canada. Yeah, yeah, yeah. So, I mean, it's difficult.

[00:54:52] It's, again, good in theory, like difficult in practice. But it's going to be interesting to see what set of rules they would come up with if that's how the election goes, obviously. Like that's a policy that is not to both parties. No, exactly. And maybe we'll wrap it up on this as the latest. It's hard to, I love looking at this, the poly market odds. Oh, yeah. So, yeah, we can wrap it up on this.

[00:55:22] So, who's going to be the next prime minister according to poly market? Mark Carney is a 65% chance favorite at this point. It's gone all the way up to 70. I was actually looking to bet on the conservatives because it felt too much out of whack. And the way poly market is, it's just a predictions market. So, I think it's just another point of data. I know a lot of people will say, oh, it's just betting.

[00:55:46] But also, you know, I think it's important to look at all the different data, whether it's this, different polls, anecdotal data when you talk to people. I think it's important just to get a bigger picture. So, 65, 35. We'll have to see how it moves. But the way poly market works is you can kind of say buy 35 for Poitier if you think he's going to become prime minister. And you pay essentially 35 cents for a token that's worth a dollar.

[00:56:14] And then depending how this moves, if he goes up to 45, then you're actually looking at a nice profit. That's how it would work because then you get 45 cents on the dollar when you've paid 35 cents on the dollar. So, it's something that's interesting. I may actually dabbled in it. I'm just kind of interested to see how it works. I haven't tried it yet, but I have a few buddies that know how it works. So, I think I'll ask him for some help and maybe put a few hundred dollars just for fun there.

[00:56:43] Well, and it's funny to look at this. Like, Carney has the odds, but like less volume. So, less people are making the bet that he'll win. That's interesting. I don't know how. It's interesting. Like, how does that move? Oh, I guess you could buy no. Yeah, you could buy yes or no. Yeah, well, then no. So, the yes is usually cool. So, if you're looking at it, it's a two-horse race.

[00:57:07] So, essentially, the yes for Carney will be the equivalent of the no for Poitier and vice versa. Yeah. Interesting. So, yeah. Anyway, so I think we've gone long enough. Appreciate you sticking with us while we looked at one of the policy announcements from the Conservatives. So, if there are some more that we think are useful to bring on the podcast because it does impact investing in Canada, we will talk about it.

[00:57:36] We'll try to give a good overview. And then we can provide on our opinion whether it's a good idea or not. I think we did a good job. Obviously, I don't think it's the best idea. That's just my view on it. Let us know what your view is. That's fine if you don't agree with me. A lot of people on Twitter did not agree with my stance, and that's completely fine. It's fine to listen to different opinions. And I've looked at people who say it's a really good idea, and they made some good points, too. But that's my view around it.

[00:58:05] So, we appreciate anything else you want to add? No, that's it. Thanks for listening, everybody. Okay, thanks, everyone. The Canadian Investor Podcast should not be construed as investment or financial advice. The hosts 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.