Before we get started, we’d just like to state the approximate release dates of our content through this jam-packed January:
- 1st week of January – Our US Foundational Stocks
- 2nd week of January – Our Canadian Foundational Stocks
- 3rd week of January – New Bull List options
- 4th week of January – Start of our model portfolio reviews
Quite possibly the most impressive showing in 2021 at Stocktrades Premium was our Foundational Stocks. Not only did this list of 11 core holdings outperform the TSX Index by more than 5%, but up until the Christmas holidays it was outperforming the high-flying S&P 500.
The Canadian markets were closed for a couple of additional days over the holidays while the US markets stayed open. So, the S&P 500 eventually did break away, returning just shy of 2% more. But, for this list of Canadian companies to keep pace with one of the fastest-growing indexes in North America is a massive accomplishment.
The outperformance marks the 2nd straight year in which our Foundational Stocks have outpaced the TSX. And considering we only introduced them 2 years ago, they’re currently undefeated.
In this e-mail, we’re going to take a look at each individual company and how they performed in 2021, from the best performing to the worst. Keep in mind, we’re still in production of our Canadian Foundational Stocks for 2022. So this overview does not necessarily represent the 2022 list, but merely an overview.
Near the end of the e-mail we’ll also go over our 2022 outlook and what we expect from the markets this year. Let’s get started.
Loblaw (TSE:L)
Many times through 2020 members had questioned us on whether Metro or Empire was the better grocer pick over Loblaw. We stuck to our guns, leaving Loblaw on the list in 2021 after having a very subpar 2020. And, it paid off significantly.
With gains just shy of 70%, Loblaw has been one of the best performing large-cap stocks on the TSX this year as the market finally figured it out.
The best part? Despite this runup, the company is still cheaper than both Metro and Empire on a price-to-free cash flow basis, trading at only 7.7 times trailing free cash flow.
The company has one of the largest reaches in the country, with 90% of Canadians being less than 10 kilometers away from a Loblaw.
Constellation Software (TSE:CSU)
Constellation Software continues to be one of the best capital allocators in the country. With returns of 44% in 2021, it was seemingly immune to the large tech selloff.
The company deploys an acquisition-based growth model and has average returns on invested capital of 30.4% over the last half-decade. If you’re curious as to how this compares to high-flying US tech options, this is a better ROIC than Apple, Microsoft, and Alphabet (Google) over the same timeframe.
If you’re going to learn one ratio in the investment world, return on invested capital is arguably the most important. It is the favorite ratio of many of the world’s most famous investors, including Charlie Munger and Warren Buffett.
It measures the return an investment generates for those who have provided capital to the company (shareholders, bondholders.) In short, it will tell you how good a company is at turning invested capital into profits.
As of right now, if you cannot afford a share of CSU, the best way to gain exposure is through the tech ETF XIT. But, we’ve pressured Wealthsimple to get this outstanding company on its fractional share list as soon as possible.
Granite Real Estate (TSE:GRT.UN)
Granite was a replacement for our former Foundational REIT RioCan. After RioCan cut the distribution, we felt a strategic shift was needed to a more promising company and a more promising real estate sector.
Despite RioCan’s price recovering quite a bit in 2021, Granite kept up with the company, underperforming RioCan’s 2021 returns by only 2%. Do we regret the switch? Absolutely not.
Span returns out to a 3-year period, and Granite has outperformed RioCan by 7.4x. Although in our eyes it is a neck and neck race between Granite and Dream Industrial REIT, we view Granite as the best-in-class REIT in the country.
With a payout ratio in the mid 50% range and revenue growth expectations in the high double digits, we’re still confident the company can perform in 2022, despite it gaining more than 35% in 2021.
Royal Bank of Canada (TSE:RY)
If you had reasonable exposure to Canadian financials in 2021, your portfolio benefitted significantly. Despite returning 33% on the year, Royal Bank was one of the worst-performing Canadian banks in 2021.
However, let’s not forget it was also one of the most resilient during the peak of the pandemic in 2020 due to its global exposure. The company has grown the bottom line by 7% annually over the last half-decade, and if interest rates are to rise in 2022, this growth could very well be eclipsed.
It might not be the best performing bank on a year in year out basis, but there is no questioning it is the most reliable.
Alimentation Couche-Tard (TSE:ATD)
When Couche-Tard dropped into the mid $30 price range in early 2021 based on a failed acquisition attempt of French grocer Carrefour, we felt it was a golden opportunity to grab a Canadian blue chip at an outstanding price.
Not only did Mat and I add ourselves, but we sent an e-mail out to Premium members to seize the opportunity. Since that dip, the company has returned more than 43%.
Despite the pandemic wreaking havoc on the business, the company continues to drive double-digit earnings growth and even raised the dividend by 26% in 2021. The company has one of the best management teams in the country, maintaining double-digit returns on invested capital since the early 2000s.
Telus (TSE:T)
Telus ended up underperforming its telecom peer BCE Inc (TSE:BCE) this year. However, both had exceptional returns, north of 22% including dividends.
Over the last 3, 5, and 10-year periods Telus has outperformed BCE by a significant margin, so it’s not that surprising that BCE finally reclaimed a bit of the spotlight. 2021 was the year for value and blue chips, and BCE is certainly viewed as more of a blue chip option than Telus.
Make no mistake about it however, Telus is still in our opinion the best telecom company in the country. With more avenues for growth in high-margin businesses like telehealth and security, we believe the company is in the best position to reward shareholders over the long term.
Although Telus is one of our Foundational Stocks, we don’t want to give members the impression holding other telecom options like BCE or Quebecor is a bad idea. They are still strong companies, especially for those looking for higher income in BCE’s case.
Fortis (TSE:FTS)
Quite possibly the steadiest option on this list, Fortis posted outsized growth in 2021, earning 22% total returns. The company was the 2nd best regulated utility option in the country in 2021, falling behind Canadian Utilities (CU) by a mere 0.5%.
It’s not surprising that Canadian Utilities had an exceptional year in 2021 as the company has sizable exposure to oil and gas and Alberta. Over the long term though, in our opinion, Fortis is a much stronger option. In fact, over the last half decade it has returned 3x that of Canadian Utilities.
With a beta of 0.08, suggesting this stock has around 1/10th the volatility as the overall market, many investors view Fortis as more like a bond than a stock. If you had invested in Fortis 10 years ago and reinvested the dividends, you’d be sitting on a 10.5% compound annual growth rate. Considering how reliable this company is, with 99% of its earnings coming from regulated utilities, a double-digit CAGR is exceptional.
TC Energy (TSE:TRP)
Considering this review goes from highest to lowest in terms of returns, the fact we’re on our eighth stock and still sitting on 20% total returns is outstanding.
However, TC Energy did underperform other major pipelines here in Canada as there were multiple events that shareholders didn’t like. For one, although most of the impact of the cancellation of the Keystone XL Pipeline was priced into the company, it did trade sideways for the duration of the year after it was officially announced.
Secondly, the company released that it would be reducing its dividend growth rates as it sees more opportunities to spend the money internally to fuel growth. For short-sighted investors and those who focus too much on yield, this likely caused them to sell.
However, it’s important to understand that a company utilizing capital to fuel internal growth is much more efficient and more rewarding to shareholders in the long term than a dividend. Our aim at Stocktrades Premium will always be total returns, as it should be for most investors.
TC Energy is now the cheapest major pipeline in the country by a wide margin, and its underperformance in 2021 could fuel outperformance moving forward as valuations are attractive.
CN Rail (TSE:CNR)
With returns of 13% over the course of the year, CN Rail underperformed the broader indexes, primarily because of a failed acquisition attempt of Kansas City Southern. After the announcement, the company traded sideways as the market didn’t like the price nor the amount of debt the company would take on.
Combined with this, there was a spat with CP Rail over the acquisition itself, which ultimately led to CN Rail backing out and CP Rail closing the deal. As of right now, the company is trading at a premium on nearly every front compared to its peer CP Rail.
However, there is a chance that the acquisition of KCS could have negative impacts on CP Rail over the short term, and investors hate uncertainty. Typically, these companies trade very close in terms of valuation. But ever since it was confirmed CP Rail was indeed the winner in the KCS debacle, the market has adjusted valuations.
Franco Nevada (TSE:FNV)
It wasn’t a good year for gold as it dipped 4% on the year. This isn’t surprising, as the precious metal tends to do well during times of uncertainty and market volatility. Considering the S&P made all-time highs 69 times in 2021 and had one of the lowest annual drawdowns in its history (-5%), volatility was virtually non-existent.
Franco Nevada was not only ignored because of the booming economy due to the recovery from the pandemic, but many younger investors viewed Bitcoin as more of an uncertainty and inflation hedge than gold.
Whether or not you agree with this, it was clearly a factor in 2021. Franco Nevada, particularly because of its streaming business model, is still one of the most reliable material plays in the country. If we span its returns out long term, it has been an exceptional performer.
In the time it has been a Foundational Stock, Franco Nevada has put up strong total returns of 34%, making it one of the best performers in the material sector.
Brookfield Renewable Partners (TSE:BEP.UN)
From one of the best performers in 2020 to the worst performer in 2021, Brookfield Renewables had a tough year. However, the selloff was not unique to BEP. In fact, it was the entire renewable sector.
Companies like Greenlane Renewables, Algonquin Power and Utilities, Northland Power, Innergex Renewables, Transalta Renewables, and Polaris Infrastructure all struggled in 2021 as the renewable euphoria from 2020 faded. It is difficult to predict how renewables will perform in 2022.
But as always, we shouldn’t be worried about short-term results. If you had simply purchased Brookfield and held it for the last half-decade, you’d be sitting on annualized returns of 24%. The company remains the largest pure-play renewable company in the world, and Brookfield has a long history of providing strong returns for its shareholders.
Our outlook for 2022
If you were a member in early 2021, we released an outlook on the markets, how to navigate them in their then overvalued state, and how to make strong long-term investment decisions.
For the most part, our statement of a rising tide lifts all ships proved to be true. Many high valuation speculative companies got hammered in 2021, and boring value plays like our Foundational Stocks outperformed in a big way.
Our main strategy, one we reiterated numerous times in 2021 was to focus on the core of your portfolio and keep your speculative holdings smaller. In 2022, we’re going to be doing much the same.
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Canadian stocks and the Canadian market, in general, are providing a unique opportunity for investors. In fact, as you can tell by the chart above (courtesy of BMO Capital Markets), the last time there was even close to this large of a valuation gap between US and Canadian equities was for a short duration during the dot com bubble.
The large gap is most certainly fueled by the general undervaluation in the oil and gas sector, but this won’t account for all of it. Compared to their US counterparts, Canadian stocks are cheap, there is no doubt about it. There is a strong chance we could see this valuation gap close over the next few years, much like it has every time a gap has existed in the previous 31.
This is not to say we aren’t investing in US companies. In fact, as you probably know, we’re releasing our Foundational Stocks from the United States fairly soon. But with valuations stretched thin south of the border, we’re much more bullish on Canadian equities today than we have been at any other point in time.
The valuation gap could close in 3 ways. Either an increase in Canadian equities, a correction in US equities, or a blend of both. In any situation, those who hold Canadian companies will benefit. As such, I’m (Dan) planning on increasing my exposure to Canadian stocks in 2022 and adjusting again when the valuation gap closes. Whether 2022 will be the year this happens is impossible to say. The market over the course of a year is simply unpredictable.
The growth correction in 2021 has also impacted Canadian growth companies that didn’t have sky-high valuations in the first place. As a result, there are plenty of opportunities in the Canadian growth market as well.
And, we’re excited to bring you those opportunities in 2022 and beyond.
