A small update on Acuity Ads
Acuity Ads was the subject of a hard selloff on Friday, and many members are wondering why. Most of the selloff was because of a weak earnings report by Snapchat, one in which the company revised its forward outlook down and missed revenue estimates.
Why would this potentially impact Acuity? Well, Snapchat’s reasonings for reduced numbers was primarily because of lower advertising demand due to supply chain issues. Advertisers are not looking to advertise for products they simply cannot deliver. The company also issued a warning that Apple’s new security measures could impact ad revenue moving forward.
Overall the impact on Acuity is unknown, and right now the selloff is simply pure speculation. You’re seeing it across all digital companies right now that depend heavily on advertising revenue like Alphabet, Facebook, Twitter etc. But, none of these companies have declared any sort of actual impact. Knee jerk reactions rarely turn out to be profitable, and we prefer to digest actual data.
These companies report earnings soon, and we’re going to have our eyes glued to these reports to see if there is any signs of troubles, and will keep you updated.
A popular member question answered
We are going to deviate a little from our initial plan for this week’s newsletter to answer a question that many of our members have been asking lately. And that is what exactly a triple-threat stock is, and what Premium highlighted stocks currently present a triple-threat opportunity.
We get this question quite a bit and while we’ve explained it a few times before, we’re sure members will appreciate a more in-depth explanation and the opportunities we currently see.
What is a triple-threat stock?
Before we jump into answering the question itself, let’s start with some basis.
Stocks are typically classified under three categories: value, income and growth. A value stock is one that is trading at a discount to intrinsic value. Intrinsic value will mean different things to different people, and can be calculated many ways.
However, you typically assess one’s value by comparing certain metrics against its peers or even its own historical averages. This category is the more complicated of the trio as value will be in the eyes of the beholder.
Where do value plays fit on our Bull Lists?
A stock we identify as strong value can end up on either the Dividend or Growth Bull List, depending on what the company offers more of (growth or income.)
A couple examples of this? Our highlight of TFI International in the high $30 range on the Growth Bull List. Yes, this company did pay a dividend, but we felt TFI offered more on the growth front moving forward. And if we look to the Dividend Bull List, we identified Capital Power (TSE:CPX) as a value play, but with a 7%+ yield at the time, felt it was better suited for income investors.
Getting back on track, an income stock is far more straightforward. Any stock that pays a dividend and/or distribution is considered an income stock. No matter how low the yield, if it pays then it falls under this classification.
A growth stock is also pretty simple. The formal definition of a growth stock is one that is growing at double-digit clip (10%+).
A common mistake retail investors make is to view these categories as inter-dependent. The truth is, they aren’t. A stock can fit in either one, two or all three of the categories.
This brings us full circle. What is a triple-threat stock? It is one that falls under each of the categories
I (Mat) use a few more stipulations and at times they are fluid, but let’s detail my approach a little more.
I won’t speak on value because that is far more complex and will depend on the industry, stock, peers, etc. Many factors play into the calculation of value and it changes by company.
There is no cookie-cutter approach to determining good value, no matter how many websites tell you they have the “perfect” intrinsic value calculator. In fact, most of these websites are actually doing a disservice to many investors, especially beginners.
With that in mind, let’s turn to the income portion. While technically any stock that pays a dividend/distribution is an income stock, I do like to flush this out a little more. If the stock’s yield is greater than 2%, then I’ll include it as an income stock. No other requirements here.
Do I exclude those with a dividend yield below 2%? Absolutely not. If the stock yields below the 2% threshold, then I include a dividend growth factor. If the company has a minimum five-year history of dividend growth (IE is an All-Star or Aristocrat) AND is growing the dividend at a double-digit pace, then I’ll certainly include it.
Unless you are at or near retirement, I’m not a fan of ignoring low yielders
In fact, these companies have been some of the best performing stocks in my portfolio.
A great example of this, and one Premium stock we would certainly deem a triple-threat, is our Bull List stock Equitable Bank (TSX:EQB). The company is cheap, grew the dividend in 11 of 12 quarters (yes quarters, not years) prior to the required dividend freeze, and is currently growing at a rapid pace.
You’d be surprised how fast a dividend growing at a 25% clip over five years can compound. In fact, as the years pass an investor can generate more income from this type of holding than a higher yielder that never grows the dividend, or grows it at a very slow pace.
I look for consistent growth pre-pandemic
In terms of growth, I’m also looking for consistency. Good example, in 2021 most every company can lay claim to double digit growth. Why?
They have an easy comparator given how the pandemic impacted the top and bottom lines of many companies.
Once again, I look for a consistent streak of top line or bottom-line growth. I like to see five years worth but am ok with less if they are a newly listed company. However keep in mind that less history does come with more speculation in most cases.
I also want to see forward estimates for double-digit growth. A good example of this was Canadian Utilities a few years ago.
There was a point it was growing earnings at a 10%+ clip, but growth started to slow a little bit. If one had looked at forward estimates, one would have noticed that flat growth was expected for the foreseeable future.
This is a good example of how past history is not a precursor to future success
I always make sure I check both historical and expected growth rates.
I’ll usually focus on revenue, EPS growth and where available, EBITDA. Which one I use will be stock dependent but if I’m looking at a young company that isn’t profitable, then I prefer to look at revenue growth rates.
For larger more established companies, I’ll look for either EPS/EBITDA or maybe even all three. Once again however, that’ll be industry/stock dependent.
Is Magna International a triple-threat?
The question about triple-threats came from our Magna Discord channel. So let me answer this specifically. Is Magna a triple threat? At this point, I’d say no – and here’s why.
First and foremost, the company is about fairly valued here. This is especially true because of the uncertainty around chip supplies and the havoc that is causing. Buying an excellent company at fair value is not a bad thing, but I would not consider Magna a value stock.
Is it an income stock? Yes. Magna yields just above 2.18% and it has a pretty impressive dividend growth streak (11 years) and has averaged ~16% annual dividend growth over the last five years. So even if yield dipped below 2% (which it has), it’d still consider it a solid income stock.
Finally, let’s turn our attention to growth. Once again, chip supply issues are impacting growth rates and as we’ve seen, the company has had to revise guidance downwards. The company was also significantly impacted by the pandemic but pre-covid it did post solid growth.
Overall, Magna is a great opportunity for patient investors willing to grab a hold of this blue-chip company, but the current economic environment is preventing it from being a true-triple threat. Once supply chain issues are behind us, Magna has the potential for outsized growth considering the developments in EV.
Overall, triple-threats are a rarity in these current market conditions, but we do have one more
We’re constantly scanning for these types of opportunities, as they’re investments that we rarely pass up. We’ve identified plenty of triple-threats in the past such as Goeasy Ltd, Capital Power, TFI International, Park Lawn Corporation, Premium Brand Holdings, Savaria and current Bull List stock Equitable Bank.
But, market conditions are making them extremely difficult to come by. Although there are still options out there that provide value, it’s difficult to find those that provide value, growth and a strong dividend.
The most recent highlight here at Premium that fit triple-threat criteria would have been Titanium Transportation (TSEV:TTR). However, this stock was simply too speculative to fit the criteria of our Bull Lists, so it was added to our Watchlist.
It remains a high risk/high reward triple-threat option for those who have a bit more tolerance for risk. Since our highlight, the stock is up around 32%. However, it is still only trading at 11.5 times forward earnings.
