Beer Sales Up and Bitcoin Takes a Dive

[00:00:00] Welcome back to the Canadian Investor Podcast, I'm here with Dan Kent. We are back for our earnings and news and it was definitely a bit of a slower week I would say but we still managed to get some good content for everyone listening.

[00:00:28] Dan how's it going? How are things in Calgary? Have you been to the Stampede? No, I haven't been to the Stampede in years. I mean I think it's like a lot of Calgarians

[00:00:40] love it but I think it's mostly like an outside thing. A lot of Calgarians don't like it either because it's just expensive, it's crowded. It's gonna be like it was what was it 31 degrees here yesterday? It's supposed to be like 34 Wednesday so I would imagine

[00:00:57] the Stampede grounds are gonna be like 40? Yeah. I hear it's a dry heat in Alberta so it's been very hot here too but it is on my to-do list to get done to at least I go there. So maybe

[00:01:11] when I go visit you and one of my buddies that lives there I'll try to time it with the summer. Yeah we can we can go down to the grounds and get a $27 lemonade.

[00:01:22] There you go. Sounds pretty enticing but we'll get started because we do have a decent amount on the slate so we decided to look at different companies, different news, some of the a bit

[00:01:34] like we've done recently the last recording where companies where we kind of just didn't have the time to look at they may have reported a few weeks or a month ago or so so we'll do that.

[00:01:43] There are some earnings and news as well items that came up in the last week that we'll touch on. So to start off here I'll start off with Molson Coors. So Molson Coors not a company

[00:01:54] that we've talked a whole lot on the podcast but I still think it's interesting and I'll be also touching on Constellation Brands not to be confused with Constellation Software to very different businesses here so Constellation Brands is a company that also does a lot of

[00:02:15] you know does beer sales with brands like people we will be familiar with Corona for example so they own that but Molson Coors of course they own a variety of brand like all the Molson beers they also

[00:02:27] own Millers Coors Light. So interesting to look at just to see where these kind of companies are going forward and especially these two companies are pretty much not identical but in the same

[00:02:40] kind of business so it'll be interesting just to look at how the numbers look for both of them. Now revenues for Molson Coors were up 11% to 2.6 billion on a year-over-year basis now just to

[00:02:54] keep in mind here these are four earnings that were reported on April 30th so they're coming out with their next earnings in three four weeks I think so it's the latest one but a bit delayed

[00:03:04] like I said before they saw strong volume growth in North America driven by more the man for Coors Light and their Millers brand they saw cost cutting measures help profitability which can be reflected in their operating margins that almost doubled the over year from 6.75% to 12.18% net income was

[00:03:27] up 184% to 208 million interestingly enough though their interest and expense peaked in 2017 at 350 million a year and has been going down ever since so with the trailing 12 months being 223 million so when you look at their long-term debt you actually have a better picture it's not surprising

[00:03:51] because it peaked in 2016 at 11.3 billion and is now down more than half at 5.2 billion I thought was an interesting note because that's not a conversation that we have been having a lot right then so for the most part here you're seeing companies that are looking at the opposite

[00:04:09] right interest expense is going way way up so this is uh was definitely a bit of a surprise not a company that I kind of follow all that much and I thought it was just an interesting

[00:04:20] point to note yeah it's definitely like the debt reduction right now is kind of the opposite of a lot of companies right now especially like when we'll go over open text next they've ballooned their debt just because of acquisitions but it is interesting with these companies because supposedly

[00:04:37] historically I think as the economy has gotten weaker their results have gotten a bit better beer sales things like that I know like Molson Coors does sell like more I guess you could

[00:04:48] say like discounted beers like I know Miller is not a very expensive beer I don't think Coors light is either I don't follow this company at all I know they haven't done very well over the last uh

[00:05:01] well I don't think they did very well ever over the last decade but it doesn't seem like all that bad a result no you're totally right and for joint TCI subscribers they'll be able

[00:05:13] to see what I'm talking about so that you really see the debt that has steadily been going down again it's not a company that I followed all that closely I held it briefly in 2020 late 2019

[00:05:25] as well but again I'm going up for a lot of things I'm going more on memory and obviously what I read uh doing my research here and then the interest expands same thing you can see it's steadily

[00:05:35] going down so I think you know I think it's for a lot of especially Canadian companies that are debt heavy I think this is probably a good lesson or a good model to follow at least on the debt reduction

[00:05:49] kind of side to just show that yeah like I mean it does give you a whole lot more flexibility by reducing that debt well yeah and they're like if you were to look at the chart you would see it

[00:06:00] you know it's kind of leveled off that it peaks in 2016 and that's when they actually bought Miller so they bought Miller for 12 billion in 2016 so the debt skyrocketed and they've spent the last

[00:06:12] I don't know what would that be eight years paying it down so it's all uh it's just an acquisition related debt obviously and uh it seems to be working quite well for them I mean

[00:06:24] they're reducing the debt quite a bit I don't know how like I said I don't follow the company enough to know how well the acquisition of Miller has done but they they paid quite a bit for

[00:06:33] it when you think about it because they're what they're a 14 billion dollar company and they paid 12 billion for Miller so yeah no exactly I think it's just a good point I think that's what companies

[00:06:44] should be doing if they take on a lot of debt to make an acquisition or for whatever reason I think this is a good model I think companies what we've seen in the past decade is companies

[00:06:55] lack of better words have gotten high on cheap debt because you know it's not really hitting their bottom line because the interest is so low so companies just piled on more and more

[00:07:05] debt a lot like consumers right consumers have done the same thing because the payments are manageable you're not paying a whole lot of interest but now what we're seeing is the bill is coming due and

[00:07:16] a lot of companies that did not properly manage their debt are starting to struggle financially because they have to refinance at higher rates and when they had the chance to lower that debt they did not they did whether it's pay a high dividend or did share buybacks they

[00:07:32] decided to do that instead of using the prudent more conservative approach so I thought it was just interesting to mention that now the last couple of things here EPS tripled to just shy of a dollar

[00:07:43] per share free cash was negative to the 2,090 million slightly worse than last year but you know nothing crazy and that was primarily due to higher capital expenditure compared to last year and to keep in mind that's typically the slowest quarter for these kind of companies the first like

[00:08:01] you know the first three four months of the actual calendar year that's when they'll you know they'll see the sales being the slowest and then it picks back up for the summer months and then stays

[00:08:12] relatively high for the kind of fall Christmas holiday areas and then in terms of guidance they are guiding for net sales to increase in the low single digits for 2024. Yeah I wonder if that's like a resolution thing too you know new year no more boots could be yeah

[00:08:30] maybe it could be an element and then by by March they've given up. Yeah our people are no pun intended tapped out financially after the holidays and for those who don't know their ticker on the US

[00:08:44] listed exchange is TAP TAP so it's a good ticker oh really that is a good ticker yeah yeah but that's it for it I think I'll we'll switch over here to some news from Open Text not great news for

[00:09:00] those affected but still a Canadian company so do you want to go over that. Yeah so I was looking into these layoffs and they're actually ended up being quite a bit of good information here so

[00:09:10] Open Text is a mid cap software company here in Canada I think their market cap is around 11 billion somewhere around there so original headlines were saying that they were laying off 1200 workers but when you dig into the press report they're laying off 1200 and adding 800

[00:09:27] positions to its sales and engineering departments in different segments of the business so it works out to be only around a 1.7 percent reduction in total staffing levels so if you look at their initial staff they have around 23,000 staff so I mean it it's they're cutting by 12 in

[00:09:45] particular departments and adding by eight and others there isn't very much commentary on the laid off positions but the new positions will go towards growing its cloud security and artificial intelligence segments this is kind of an effort they're calling Open Text 3.0 so I would imagine

[00:10:02] the transition is just from some legacy business segments the company has directly from the company themselves they say the shift is more about placing the right talent in the right locations

[00:10:13] of the business I followed Open Text for quite a while like layoffs are not exactly a new thing the company dumped 8% of its workforce in early 2023 after it made a huge 5.8 billion dollar acquisition

[00:10:26] of one of its main European competitors micro focus so the layoffs will initially cost the company around 60 million dollars but they expect that it will save the company more than 150 million in annual expenses moving forward and again there you know there isn't much commentary

[00:10:41] as to what departments are getting cut this would have been interesting to know and I imagine it'll come out eventually but they don't have any information on it right now so Open Text typically

[00:10:51] makes you know they do make big acquisitions but they also make quite a bit of smaller acquisitions that you know they're not notable to overall you know it's overall financial results so they

[00:11:01] aren't really all that public and there's a good chance that you know they're just kind of trimming some of the fat here of maybe some positions they didn't really need post integration and the interesting thing is in researching these layoffs I came across like kind of those employment

[00:11:16] sites where you can kind of review your your employer and you know how it is to work there and Open Text does yeah something like that it wasn't there was Glassdoor and there was another

[00:11:28] one and I mean Open Text does have a couple ugly ones one of them was even saying that it's a continual slaughterhouse of layoffs just due to their acquisition strategy so they bring new companies in and effectively eliminate a lot of the redundant positions

[00:11:45] Open Text has struggled quite a bit since its acquisition of micro-focus so you could say this was a pretty strong acquisition at a pretty horrible time as the company effectively doubled its overall debt load so they went from 5.2 billion to 12.25 like right when interest rates

[00:12:00] started going up it's managed to pay off about a billion dollars of that debt over the last year but they still remain quite a bit you know they still remain high at 11.31 billion and

[00:12:11] like I said this is a company with a market cap of around there so that's that's a pretty big debt load for them and as a result financing expenses are through the roof for for Open Text

[00:12:22] they've went from around 151 million in fiscal 2022 to around 575 million over the last 12 months and uh I mean it's not like I said it's not exactly surprising this company does make quite a few acquisitions so typically they'll you know make smaller ones bigger ones they don't

[00:12:41] need the staff levels so they'll they'll end up cutting them but yeah it's uh it's a pretty interesting time for Open Text like they've had to you know transition to you know taking advantage

[00:12:54] of the AI boom you know they have a lot of cloud software they have a lot of subscription services it's the bulk of the business but for right now it's just been financing costs that

[00:13:05] are weighing quite a bit on the company and it's it's down quite a bit from you know the highs over the last few years okay you know that's a great overview and I got a little distracted there

[00:13:14] by my dog barking but I pulled up a glass door here for Open Text and you're right 3.6 out of 7 out of 5 star not that great in terms of reviews and I was just looking at it quickly and

[00:13:29] you know so yeah a lot of mentions about the layoffs so it's not you know probably not the best environment for some employees but clearly I think it's just part of uh part of the deal

[00:13:42] when you join them yeah they have uh I looked up a few they have a few Reddit threads as well and it's it's kind of apparently a going trend if you get acquired by Go Easy your uh sorry not

[00:13:55] Go Easy Open Text you're uh you're in the crosshairs for sure you don't want to be acquired by them because they're probably trimming a bunch of company a bunch of employees from the acquired

[00:14:04] company but um they didn't really like yeah like I said the headline is not as bad as it seems because like they're laying off 1200 and putting 800 somewhere else so yeah exactly so uh no I think

[00:14:17] that was a good overview not a company I follow that often but I think still you know some Canadian news so definitely uh have to talk about that now next on the slate here we have consolation

[00:14:28] brands like I alluded to so the ticker for that for those not familiar with it is STZ or STZ however you want to pronounce the Z or Z I feel like I hop around depending on uh you know what my

[00:14:43] mood is again a given day but since it's quite slow I thought it was like I mentioned before just interesting to see what the differences would be between consolation brands and moles and cores

[00:14:56] like I mentioned before they own like especially they own other like kind of wine and spirits as well but they're not as well known the big brands are corona and medulla and in terms of sales

[00:15:08] they were up 6 to 2.7 billion beer sales were up 8 to 2.3 billion with operating margins for beer beer sales up double digits beer volume was up 7.6 percent wine and spirit revenues are definitely struggling so those they were down 6 to 389 million and volume was down 5.1 percent

[00:15:31] it's an interesting divergence here between both of them because you can clearly see that when looking at the last 10 years that the wine and spirit sales have been on a declining scale and then

[00:15:44] you have the beer sales that have been doing quite well so I'm not quite sure if it's just necessarily the um you know just the brands that they own don't necessarily resonate with

[00:15:55] with their customers I'm not quite sure another company that would be interested to look at in terms of zoning in a bit more on spirits is a d8 diaggio you're you familiar with that one

[00:16:08] yeah yeah I've never heard of them known yeah no they own like some very well-known brands so um I'm gonna look up the uh so diag eo and the ticker for them I think it's something pretty

[00:16:25] simple here so it's easy yeah d.o.o. d.e.o. yeah oh that's the ticker yeah so that would be I've never heard of them yeah yeah so that they focus definitely more on the actual and a spirit side

[00:16:43] but having said that it's just interesting to see kind of the divergence between the two where the beer revenue has been doing quite well and it's the opposite for the wine and spirit now operating income as a whole was up 23 to 942 million operating margins were up 440 basis

[00:17:02] point to 35.45 interest expense has been relatively stable so different story here compared to moulson so it's been relatively stable over the last five years if there is a company if this is something

[00:17:16] that interests our listeners and make sure you dig into on how that debt is structured here because it is kind of up and down a little bit net income was 545 higher to 877 million

[00:17:29] eps was up in the same range to four dollars 78 free castle was down 19 versus last year to 350 million and for those not aware so they have made a let's just call it a terrible investment at

[00:17:46] this point in canopy so they made that investment I think it was back in 2018 they had invested four billion dollars and essentially they've been writing down that investment for the last couple years here they've written off over 1.2 billion in that investment and they even mentioned on their

[00:18:04] 10 Q which is the quarterly report in the US that there are significant concerns about the ability of canopy growth to continue as they go in concern you know in terms of accounting speak

[00:18:15] when you have something that can continue on a going concern basis just mean that the company you know there's no imminent risk to the company and reasonably it can continue operations for

[00:18:27] you know the next year and years to come you know that's usually how to look at that but if there is a concern about the going concern is that there is some significant risk and the accountants and the auditors are basically highlighting that to tell you that look

[00:18:42] there's a lot of issues here and we don't know how long this can continue they may survive they may not but it's definitely not in good financial health yeah I'm actually surprised that they've only

[00:18:54] written off 1.2 billion of it because I'm pretty sure they invested in canopy like near not near peaks but I remember it was pretty big news back pretty close but yeah it was uh it was close so

[00:19:08] 1.2 billion and right off site I mean I'm actually surprised it's that low I mean this is kind of like constellation brands is just kind of like the the the Mexican beers whereas Molson Coors is like the

[00:19:19] American beer yeah constellation is like medello victoria corona whereas Molson Coors is like your like your Coors banquet Coors like Molson Canadian things like that so two like different areas of beers I mean I would say constellation brands is a lot more expensive except in Mexico

[00:19:38] actually corona is cheap in Mexico yeah very like I'm not a big beer drinker but I do like me a corona with the line I do like it yeah yeah especially on you know in the summer on vacation it is quite

[00:19:50] refreshing well you got to go down to Mexico because they're only like probably like a dollar US maybe a buck 25 us a beer they're cheap cheap oh well well if you go yeah usually would be like

[00:20:03] all inclusives that we go yeah get I'd get like a corona there or something like that or you know if you really wanted to have a good buzz going for the day my trick was in my younger

[00:20:16] days I don't do that anymore because I'm the father of course but Long Island Icedee does the trip yeah those all inclusives they're great they kind of get tired of the beer after seven straight

[00:20:29] days but yeah it's I don't know it's constellations kind of a kind of a mess I think they'll be paying for that canopy acquisition or the canopy investment for for quite a while even moving

[00:20:39] forward no I think you're right and total revenues I mean Dave revenues have been steadily increasing over the last 10 years so it's not looking all that bad but I guess again that investment was just a poor idea and I'm not sure it's so funny the amount of money

[00:20:56] that was well funny I mean I don't mean to I know some people lost a lot of money with investing in marijuana stock especially in 2018 when the hype was there and legalization happened in October

[00:21:07] of 2018 but I mean it was just all the signs were there Brayden and I would be talking about it when we started the podcast in 2019 and we're just saying like these valuations are crazy and

[00:21:20] it's also like just the estimation of the market and just companies dishing out like hundreds of millions of dollars to make acquisitions in the space when they had no idea of what the demand

[00:21:32] would be just some really poor capital allocation and you know I'm not saying that just in hindsight clearly in hindsight it's obvious that it was terrible decisions that were made but I'm saying that because we were saying it at the time that look this looks overvalued why are

[00:21:48] these companies like getting so much production when we really don't know what the market will look like and obviously there was a lot of hype around it and now people are seeing or investors are probably

[00:22:00] paying the price hopefully most people that invested at that time got in got out like a year or two after and the loss wasn't too bad but you know I guess as long as if that's one of you

[00:22:12] listening as long as you learn from that I think that's the most important thing look I've made mistakes investing and I think everyone has made mistakes if people say they haven't made any mistakes they're lying to you so I think that's just an important thing to remember

[00:22:26] just make sure you learn from them and you don't repeat those mistakes over and over and now in terms of the guidance sales to be up between six and seven percent beer sales to be strong between seven and nine percent and wine and spirit sales essentially

[00:22:41] flat compared to last year yeah I mean just on the on the canopy growth end I mean a lot of people just think it's retail investors that make big mistakes like this but here's a huge

[00:22:53] publicly traded corporation that made a horrible investment at peak prices so it happens everywhere and you think they would have known better but clearly they bought into the hype clearly so I don't think there's much more to add there so you want to move on to

[00:23:12] Maple Leaf Foods which I tend to forget about that this company is not that it exists I know it exists because I see they're traded the products but yeah publicly traded yeah so we were like

[00:23:25] we said we were pretty slow on the news so I was looking up news and this just came out this morning that they are announcing a spin-off so Maple Leaf Foods is looking like it's trying

[00:23:35] to snap its long long slumping stock price by spinning off the pork segment of its business into a separate company so spinning off the pork segment of the business will allow Maple Leaf

[00:23:47] Foods according to the company which trades under the ticker MFI to focus more on the consumer package goods end of the business so what that will do ultimately in their eyes is reduce the

[00:24:00] company's exposure to commodity prices which would primarily be the price of pork so I mean this volatility is pretty obvious and Maple Leafs margins at this point so if you look at a gross margin

[00:24:11] chart for the company it kind of looks like a roller coaster they had two situations since the financial crisis where margins have effectively cratered so they peaked at 16% in 2011 before falling to just 6% in 2013 and then they peaked again during the COVID-19 pandemic

[00:24:27] at 18% before you know falling back to around 7% right now I believe at the lows so the company hit all-time highs in 2017 at around $37 per share but it's you know it's failed to even come close to those highs again stocks down around 30% since 2017 including reinvested dividends so you would

[00:24:47] have had to take your dividends and rebuy the stock this works out to be about a negative 5% annualized return while the TSX has put up 8.2% annualized returns and the S&P 13.5 so Maple Leaf

[00:25:01] plans to keep just shy of a 20% position in the new spin-off and existing shareholders will receive shares of the new company the deal was approved by the McCain family who owns McCain Foods and

[00:25:12] is a controlling shareholder of Maple Leaf I believe the main guy from the McCain family pretty big position at Maple Leaf I can't remember exactly what it is although this will no doubt help reduce the overall margin volatility the company is

[00:25:29] 70% package foods and only around 30% revenues from the pork segment that's just according to their most recent quarterly report so they're effectively spinning off around a quarter of the business maybe a little bit more since 2016 the price of pork according to Y-charts has

[00:25:47] increased by over 35% so I imagine this is what is having such a big impact on the business since 2016 earnings per share and free cash flow have declined by 110% and 36% respectively stock is up around 5% on the news so with the business being you know three quarters of the business

[00:26:06] staying intact it's kind of hard to see how this all of a sudden terms Maple Leaf foods around I mean I guess the one thing would be if you if you somehow like Maple Leaf you

[00:26:14] can now isolate yourself from that pork end of the business and if for some reason you want to buy a company that solely relies on pork product sales you could buy the spin-off it's expected

[00:26:27] to close next year it's kind of it's a bit weird I think like you'd have to think that that spin-off like is there another company that just solely relies on selling pork and relying

[00:26:39] on it's very weird reason to yeah yeah yeah I mean a lot of companies do this just to kind of try to to try to turn things around and you know a lot of the commentary is always about

[00:26:51] unlocking value they're gonna unlock value from you know spinning off the the weaker side of the business you know and keeping keeping the stronger one intact but so what are they gonna do then

[00:27:01] spin off their beef their turkey and then the chicken well I don't think they have very much so their their packaging includes you know I don't think they sell like I know they do sell you know

[00:27:14] like poultry and all that kind of stuff but that's included in the packaging but I think because they sell so much pork that it's a completely separate entity of the business but I just don't I don't

[00:27:26] see a lot of demand for a pure play pork producer I don't know if they could do yeah like if I were them I do beef and then pork yeah and then you know birds yeah include all the birds together

[00:27:43] no it's just very strange like yeah yeah I mean if it was like yeah a completely different company like it would make a little bit of sense but I don't know I mean I don't know I I guess maybe I

[00:27:59] got distracted when you said it's owned by McCain because uh you know I was thinking of their deep and delicious cakes but yeah you know good fries too yeah it's uh good fries yeah yeah I don't

[00:28:13] know it's it's weird to me it was it's a weird enough spin-off that I felt it was worthy to talk about because it's gotta be I don't know maybe there's another traded a publicly traded

[00:28:23] company that focuses exclusively on pork production but uh I don't think so if you look at a chart of the price of pork it's pretty much done nothing but go straight up over the last 10 years

[00:28:37] so I mean that that segment of the business is going to be massively volatile to you know fluctuating prices so maybe they do get you know a little better results from just the packaged goods like

[00:28:48] the sandwich meats all that kind of stuff but uh it hasn't performed well the last while at all yeah and that's I guess I'll finish on this it's always a good reason asking why they're spinning

[00:29:01] it off and if it makes sense I can think of one and I haven't like dove deeply into that spin-off but you know when Jay and Jaisal Johnson and Johnson kind of separated its pharmaceutical business to the

[00:29:14] kind of consumer business where it's more like you know whatever toothpaste tile and all and all that stuff when they separated that to me you know that made logically that made some sense

[00:29:27] because these are very different type of business when you get into pharmaceutical you can think about like developing new drugs that gates takes like can take years or decades until they're approved

[00:29:37] by the FDA in the US and the different regulatory bodies around the world so that that can make more sense but here I guess we'll have to see maybe um there's going to be some you know

[00:29:50] some happy shareholders but it's just a bit of a head scratcher I'll be honest yeah yeah just it looks like they're taking the poor segment of the business and just trying to to spin it off so that they're

[00:30:03] they're packaged you know the the main packaging business kind of gets some better numbers but realistically I mean they're going to own 20% of that pork business anyway so I don't know

[00:30:15] it's weird it looks it kind of just looks like a spin-off to try and uh try and turn pretty bad like decade long performance around we'll see what it does yeah no that's good

[00:30:27] now we'll move on to uh go easy so some news there do you want to the CEO leaving so I guess there's some issues with the subprime market or it's doing well I'm not quite sure yeah

[00:30:40] yeah this one was a bit weird to me so like I found I talk about the CEO but then just overall the results and it's just kind of weird for a CEO to leave at this point when they're

[00:30:52] they're just absolutely killing it so go easy which is a subprime lender here in Canada announced their CEO Jason Mullins will transition out of the job at the end of the year so he will

[00:31:03] still remain on the board with the company but he won't be CEO so he served 14 years with the company including six as a CEO so I come I cover this company quite a bit and there was really no

[00:31:15] news of this happening uh the market didn't really seem to expect it either and it kind of spooked them so the stock is down 13 percent since the news I don't know if it's down or not today continuing

[00:31:25] to slide but over the course of his tenure go easy stock price has gone up by 480 percent revenue grown by 211 percent earnings per share have gone up by 470 percent he pretty consistently maintain returns on equity in excess of 25 percent and the company has grown their dividend by 420

[00:31:45] percent over that time frame with some gigantic increases coming during the COVID-19 pandemic go easy wasn't exposed to the regulatory impacts of the big the big banks like you know when regulators said they can't grow the dividends I believe equitable bank uh was so they couldn't

[00:32:06] raise the dividend but go easy because they don't really fit into that market like they're not a mortgage lender they're not you know a deposit based bank or anything they could go ahead and

[00:32:14] raise the dividend and they ended up doing so over that um over that time frame and again I have a feeling stock might be taken a bit of a dive recently because a replacement has been

[00:32:25] announced they pretty much said they're going to work with the old CEO and the board over the next bit to come up with a worthy successor by the end of the year so go easy has been one of

[00:32:34] the best managed and highest performing stocks on the TSX over the last bit and I mean his performance is no doubt been impressive which is which is kind of why it's strange to me that there's just an

[00:32:47] all of a sudden you know resignation and he's leaving um but overall I think you know a lot of it has to do with it yeah well he's living on top and maybe he sees kind of the writing on

[00:32:58] the wall where the business could take a turn for the wars because these business tend to do well until the economy starts taking a hit the fan yeah exactly which is what like I got a bunch of uh

[00:33:12] kind of a bunch of commentary on that as well because yeah this the subprime market is just crazy in Canada right now so I think it's like with most financial institutions we're seeing right

[00:33:24] now the weakening economy is actually a headwind whereas with go easy because they're a subprime lender the weaker the economy the better the stock is actually doing but it's actually it's it's a

[00:33:36] fine line between you know a lot of people are heading to the subprime market there's a fine line between you know issuing these loans and keeping charge off rates you know relatively steady

[00:33:47] the economy is weak enough that a lot of people are heading to this but if the economy gets too weak to the point where you know people can't pay these loans then you know it starts to become

[00:33:57] a bit of an issue so I grabbed some data on the subprime market from trans union so this is dated to last year but I'm almost positive it's it's still pretty relevant so they said the number

[00:34:08] of subprime borrowers jumped by 9% last year so this would have been 2023 hitting 2.64 million Canadians so subprime borrowers grew at nearly double the rate as near prime borrowers and prime borrowers which grew at 5% and over four times the rate of above prime borrowers which

[00:34:25] grew at 2% so this would typically be just credit like credit rating so pretty much what what they're saying is consumers with weak credit are financing a lot more stuff than those with higher credit

[00:34:37] so these companies offer financing those with bad credit or you know just the inability to get a loan from a prime level bank for some reason they charge ridiculous APRs on their loans to

[00:34:49] offset the risk of of higher risk lenders and as a result can still turn out pretty crazy earnings growth despite charge off rates being north of 9% so you're not going to see that type of charge

[00:34:59] off rate with you know a major bank uh go easy actually targets a 9% charge off rate and the rate now is actually lower than it was pre-pandemic which is pretty interesting so they recorded record levels of applications last quarter so 69% at 69% of those are coming from brand new

[00:35:17] clients and they have a weighted average interest rate on their consumer loans of 30% new customer volume also ticked up by 17% on a year-over-year basis and again i don't really want to get into quarterly earnings too much because uh they're probably going to report in the next while here

[00:35:32] but i mean i think it just it just paints kind of a bleak picture of the canadian consumer and from that you would you would send me that study that study this morning which is a

[00:35:42] little more relevant but uh 27% of canadians plan to apply for new credit or refinance existing credit in the next year so it's up 4% from the previous year and just like the subprime lenders

[00:35:57] so over the last year i kind of dug up the results on the tsx and two of the top four companies on the tsx i think the other one was ham and power and i can't actually remember the fourth

[00:36:09] but go easy limited and propel propel holdings are two out of the top four performing tsx stocks so they're each up over 90% over the last year i think propel is 98% and propel is more us based

[00:36:24] so i don't really know much about the u.s subprime market so i've never really looked into them too too much but they're a canadian traded company but you know the bulk of their operations

[00:36:32] are are in the u.s i mean it again i think it's just like it's a fine line to where you know the economy is weak enough where you know consumers need this financing but it almost

[00:36:44] can't get too weak to the point where they can't pay it exactly usually the tipping point is when job losses start happening yeah on a pretty you know pretty wide basis because typically people

[00:36:56] wex has this credit you know they either you know they'll typically not be able to qualify with banks and regular financial institutions so that's why they go for the subprime and that tends to be

[00:37:08] either people that don't you know are on the lower income spectrum or people on the other end that may have a bit too much debt but you know you accompany the subprime lender will

[00:37:19] be like okay well we'll still lend to you but you're gonna pay a lot more interest rate way higher interest so it is something it's a very fine line i mean you know people if they

[00:37:29] haven't seen it highly recommend it you know watch the big short and that's pretty much what happened to us it's a subprime mortgage market so you had people that shouldn't have been qualifying for

[00:37:41] these loans that were getting mortgages and then it was all nice and dandy until you know there was a couple things but you know they had a trigger rate that would like kind of jump up

[00:37:51] their payments and then people would just start defaulting on the loans or you had other people that you know could barely make the loans work and then lost their jobs and then we're not able to pay it

[00:38:01] and then you saw these subprime lenders get into a whole lot of trouble so that's why for me i tend to stay out of these kind of companies just because like you said there can be when times are

[00:38:15] good they're real good but when times are bad they can get real real bad and crush and it can happen it's a fine line it can't happen way faster sometimes than investors think

[00:38:26] yeah so like with go easy i mean they've been around for quite a while they went through the dot-com bubble they went through the financial crisis they went through the covid pandemic and they survived all of them but it was like if you look at their

[00:38:39] their stock during those crashes it gets ugly for you know a short duration of time and then they've eventually recovered but yeah these i hear it like because of the results that go easy

[00:38:52] there's a lot of people talking about it right now and it's uh i think a lot of people maybe own this thing without actually understanding the subprime market and just the risks not even from

[00:39:02] just a lending perspective but also from a regulatory perspective like they they came out i can't remember when it was it was probably a year ago but regulators came out and reduced the

[00:39:13] amount of ap rs these companies can charge so i think they went down from 35 percent down to 30 percent which didn't end up impacting go easy all that much because like most of their loans were

[00:39:24] below that anyway but you know if this gets bad enough regulators step in and they trim it down to 25 percent like that's something that can that can hit these companies pretty hard yeah no i think

[00:39:37] that's a good overview we'll move on here to our last segment it's been a while since i did a segment on bitcoin so i decided to do uh you know a modestly long segment not too long but um for those

[00:39:50] watching bitcoin obviously the price has been declining pretty rapidly over the last month so it's down approximately 18 percent the price is volatile so depending on when you hear or listen to this podcast and when we're recording right now on tuesday you know the price could

[00:40:06] be down more or less in the same time period you saw the smp 500 being up 4 gold is up 3 iet which is the i share 7 to 10 year treasury bond etf is up more than 1 percent so all the

[00:40:21] major asset classes are doing relatively well but bitcoin is down in 18 percent so what's going on there's three primary reasons that you know i've identified just reading a whole lot on it

[00:40:34] and listening to people who are in reading you know uh pieces that are published by people who are a lot smarter than i am and listening to them as well so there's three main ones that i identified

[00:40:46] so the first one is financial market liquidity so the more i learn about macro and the more i'm realizing how important global liquidity is in the financial markets to keep it simple liquidity means that assets can easily be bought and sold without significantly affecting the prize

[00:41:02] the more liquidity glow the more liquid global markets are the more easily capital is flowing to the financial system and vice versa if they are less liquid liquidity obviously is extremely complex

[00:41:15] i mean i've listened to a whole lot of different people experts on the subject and one of the main takeaways is none of them really agree on the ways of measuring liquidity which is always

[00:41:27] interesting because you have these people that are extremely smart that i've studied the subject a whole lot and they can't really agree i mean typically they'll agree whether um there is uh

[00:41:37] you know liquidity is drying up or there's ample liquidity in the market but what they'll look at it'll be different or it'll be similar but they'll interpret it differently it can be influenced by

[00:41:49] a slew of different things some of them and this is not like an extensive list but it would be for example interest rates money supply growth credit spreads so credit spreads for those not

[00:42:00] familiar with it it's just a difference between what corporate bonds are yielding compared to government bonds and that's one of the reasons that we constantly harp on the fact that when people say you know whether they talk about you know companies that are having debt to refinance

[00:42:18] in the next year or two and people say well the bank of canada will lower rates or the fed will lower rates people are often just missing the points unless the company is going to have a

[00:42:28] revolving facility or variable rates on their debt it doesn't have necessarily an impact it's the bond yields that will impact what corporations will be able to get on their debt obviously there's also

[00:42:41] going to be an impact whether they have a good rating with credit agencies and a whole lot of different things but i think it's important to remember same goes to when people are saying

[00:42:51] you know the housing market is going to reignite because the bank of canada lowered rates by 25 basis points or 50 or whatever it is but they forget that the five-year fixed term that you get

[00:43:02] on your mortgage that most people will get is not dependent on the variable rate is dependent on what bond yields are and if you've been looking at bond yields since the last bank of canada rate

[00:43:14] cut they've pretty much been the same the five-year bond yield for the bank of canada so that's an example that you know it does not necessarily mean that you know this is going to happen

[00:43:27] went a little bit on the tension here anything you wanted to have before i continue no that's like a good summary i mean the mortgage situation like just because they're cutting policy rates it's going to help variable rates but there's no guarantee that fixed rate mortgages will follow

[00:43:43] that there's a lot of other things at play for sure yeah exactly and i guess another thing that can influence liquidity is commercial bank lending but like i said these are just like just some example

[00:43:55] there's a slew of other ones and i am not an expert in this so take this with a grain of salt the second factor so well actually just to close up on the liquidity portion the reason i'm mentioning

[00:44:06] this is because bitcoin does appear to be very affected by global liquidity i've listened to a lot of experts on this subject and it's very seems like it seems like there's a strong correlation between liquidity and you know what bitcoin will do so essentially the more liquidity

[00:44:25] there is in the global market the more bitcoin price will tend to run up and if liquidity starts drying up then the opposite happens and bitcoin tends to be the first one to move and

[00:44:36] then other asset classes tend to be impacted by that liquidity to varying degrees afterwards so just something i wanted to mention because you may have seen in the news that a lot of people are

[00:44:47] blaming the price drop by the second factor here that i have which is the mount gox selling so mount gox was a japanese exchange i was one of the largest crypto exchanges but went into bankruptcy

[00:45:01] following a hack in 2014 they're starting to repay bitcoin to their customers some that are corporations but it's unclear if they will be actually selling those bitcoin or just transferring them to their customers that's important to know because if they're just transferring the bitcoin

[00:45:18] and the customers decide to not sell then it's not putting sell pressure but regardless the fact that it's happening as at least kind of impacted the sentiment around bitcoin and some people fearing that it will trigger kind of more price pressure on it because of some

[00:45:36] selling that could happen related to that there's also been some government specifically the german government that has been selling off some bitcoin typically governments will gain custody of bitcoin when they are seized through law enforcement so i know the u.s government has a decent amount of it

[00:45:53] i'm sure the canadian government has some as well although i'm just you know just is just i guessing at this point but i'm sure they do so this would be the the second reason and the

[00:46:03] last reason that always happens with price movements one way or another for bitcoin is leverage so whenever you have a strong price movement for bitcoin downwards or upwards you will see some corresponding liquidations for people who are levered so in this case strong movement downwards

[00:46:22] so people that were levered long so we're betting on the price of bitcoin going up on leverage they get liquidated if they can't add in more money to their margin accounts and then the price of bitcoin goes down even further because it puts some more price pressure

[00:46:38] on it the opposite can be true if people are shorting bitcoin and then the price runs up really quickly i can't even be like essentially it's a short squeeze so they're forced to sell

[00:46:48] the position and then it runs up the price so that's typically that will happen quite a bit with bitcoin if there's a strong price movement one way or another leverage impacts the movement

[00:46:59] even more yeah i uh i don't follow the actual price of bitcoin very much i just log into twitter and if there's a lot of tweets on bitcoin i know the price trending down yeah i know the price is going

[00:47:11] down because nobody a lot of people don't talk about it when it's going up but then when it's going down they like to talk about uh you know how it was probably a bad buy at the peaks i mean

[00:47:21] i i kind of sold it i got a little bit lucky and sold a big chunk of my bitcoin position at the peaks at least i got lucky looking at it right now could end up being a bad thing in a year

[00:47:33] or two if it's much higher but um i mean i you trimmed right you trimmed yeah to an allocation that you're more comfortable same as like a what i would carry with an individual stock

[00:47:45] and i think that's pretty important too because you know a lot of people might be they might have chased the returns to the upside and now you know over allocate themselves and

[00:47:53] now they're sitting here on you know staring at 20 losses in a month which i mean it's pretty minor when it comes to bitcoin for bitcoin oh yeah yeah i mean it's oh i know trust me well and you got to

[00:48:06] think like everybody's talking about bitcoin fall in 19 percent in a month whereas company like nike fell 21% in a single day so i mean there's there's volatility everywhere i mean bitcoin's a little more volatile but uh it's not just bitcoin that sees you know wild swings like this but

[00:48:24] it's just gonna be prone to more of them yeah especially the way markets are right now where it's so skewed when we if we get back to equities here right to uh so skewed towards the largest cap

[00:48:36] and you know regardless of the company that you're looking at whether it's an invidia or a company like nike more and more what we've been noticing i think you have been noticing as well as

[00:48:48] if they don't at least meet if not exceed guidance especially those that are trading at a premium there you're gonna see a big price movement downwards that's just that's just the market expectations right now yeah i remember in 2022 amazon was like terrible for that it would report

[00:49:08] earnings and dive like 15 16 aftermarket like just huge volatility and that was back when valuations were relatively high you know probably actually like 2021 you'll see a lot a lot of these companies are more expensive than they were in late 2021 2022 on a on a valuation basis so it'll be interesting

[00:49:29] if they don't meet expectations you could see that type of volatility again yeah oh i guess i'll close on you know strap on your seatbelts and enjoy the ride that's it exactly well we

[00:49:42] appreciate everyone listening i think it was still a fun episode despite things being a bit slower it's going to start picking up in the next few weeks now so it'll always going to be more Canadian

[00:49:53] content to talk about mornings and news and um it was still a great episode to uh to do and yeah appreciate everyone listening and make sure you uh you follow us on twitter i'm at

[00:50:06] fiat underscore iceberg dan is at stock trades underscore ca perfect and we'll end it on this thanks for listening the canadian investor podcast should not be construed as investment or financial advice the host and guest featured may own securities or assets discussed on this podcast

[00:50:26] always do your own due diligence or consult with a financial professional before making any financial or investment decisions