It’s going to be another jam-packed newsletter amid earnings season. So jammed in fact we’ve had to spread out the earnings reports to avoid information overload!
I want to note that we got the largest member feedback in our history this week when we sent out our annual survey. We’re still collecting submissions and plan to sit down and read through them.
If you missed our last e-mail about it, just click here to submit the survey if you’d like.
First, let’s speak on a popular former Bull List stock, Algonquin Power
Last week, Algonquin Power posted what I view as a potential thesis-changing quarter.
In our late September newsletter, we removed Algonquin from the Bull List, highlighting the fact that the forward-looking environment may not be best for the company because of its debt levels.
We did say that Mat and I plan to hold. However, in light of the recent quarter, I have not fully decided yet, but I am strongly considering moving on from the company. The quarter was so out of left field that the stock ended up tanking 19% on earnings day.
For Premium members, we are opening up early access to a video I made Friday evening about Algonquin.
I walk through the quarter, my concerns, and relay why I believe Foundational Stocks like Fortis and Brookfield Renewables are the better utility plays at this point.
This video also highlights how useful our comparison tool here at Premium can be in situations like this.
Click here to watch the video
Markets soar on a lower than expected CPI print
Last week, we witnessed some of the most significant positive movements in the markets in years. The NASDAQ gained a massive 8.10%, the S&P 500 5.9%, and the TSX Index closed the week up 3.4%.
US inflation, although still high, came in lower than expectations. There is no doubt that inflation is cooling, and it seems like our July call of inflationary peaks will look to be correct.
If inflation is slowing, interest rate increases will likely slow as well. The faster inflation can be reigned in, the quicker the Fed and Bank of Canada can lower policy rates, which are high enough right now that there is no question we will see large-scale economic impacts from them, particularly in areas like housing and commercial/residential construction.
As a result of the lower inflation numbers, over the last 30 days we have witnessed a significant melt-up in the markets. A positive movement so aggressive that it emphasizes our point that you cannot attempt to time the markets.
The majority of your gains as a DIY investor will come during a limited amount of days. Missing them could lead to detrimental impacts in terms of overall returns.
Some examples of this?
An investor who was 100% invested in the S&P 500 from 2010-2020 returned 190%. If they missed the 10 best days during that decade? Their returns were cut in half, returning only 95%. 10 days over the course of ten years has that large of an impact. It seems crazy, doesn’t it?
You might say, “well, that was a ten-year bull market. The situation is different now!”
For that, we can look to the decade from 2000-2010, which included the aftermath of the dot com bust and the financial crisis.
An investor who stayed 100% invested in the S&P 500 during this time lost 24%. However, someone who attempted to time the market and missed the ten best days of that decade would have lost 62%.
Was this the bottom of the market? Who knows. We could retrace lower, or October lows may be the worst we see.
If this does end up being the bottom, however, retail investors cannot afford to be missing months like this.
As always, buy strong companies, and hold them for the long term.
Earnings Recaps
This past week, there were more than a dozen bull list stocks that reported earnings. It might have been our most condensed week ever.
That said, if we did recaps of all of them in this email we’d be here all day, so we decided to focus on a handful – some good, some bad.
Of note, all reports are still being completed and all of them should be released at some point this week.
If you don’t see a company covered in this e-mail, it will be covered next week. If there was a material change or an issue with one of our Bull List stocks, we’d certainly be letting you know.
If you have any questions about specific companies, the Q&A or the Discord is always best!
Lets start with the good
Equitable Bank (EQB)
Equitable Bank (EQB) delivered strong quarterly results beating on both the top and bottom lines.
Earnings of $2.35 beat by $0.26 and revenue of $195M beat by $17.5M. In our opinion, Equitable Bank was arguably one of the cheapest stocks going into earnings. In fact, it was one of our October “Value Calls” here at Stocktrades Premium, a new feature where we highlight our top 3 opportunities of the month.
Equitable also reminded income investors why it is one of the best dividend growth stocks in the country. Along with earnings it announced a 7.1% raise to the dividend, the fourth consecutive quarter in which it announced a raise.
The company not only had a strong quarter, but also released Fiscal 2023 preliminary guidance following the closing of the Concentra acquisition post-quarter. The bank expects to be able to deliver returns on equity in the range of 15%+, diluted EPS growth 10-15%+, pre-provision pre-tax earnings of 25-35%, book value per share growth of 12-15% and consistent stable CET1 of 13%+.
Once again, Equitable is in for a strong 2023, and despite this run-up in price, is still cheap.
You can read our full report on Equitable Bank here
Well Health Technologies (WELL)
It seems that with every quarter that passes, Well Health is posting record results.
Earnings of $0.07 beat by a penny, revenue of $145.8M beat by ~$4M, and adjusted EBITDA of $27.5M beat by $2.56M. For the third straight quarter it also revised guidance upwards.
It now expects revenue of $565M, up from $550M and re-iterated expectations to be profitable in Fiscal 2022. Furthermore, it is now trending towards a $700M revenue run rate by the end of Fiscal 2023 which would imply 24% growth from current Fiscal 2022 guidance.
Well Health is also generating strong cash flows which will enable the fund future growth. What gets lost in the noise is that WELL is not a virtual health pureplay, it is a large clinic operator which generates strong cash flows.
Overall, this quarter just re-emphasized why we like the company, despite its significant drawdown in price.
You can read our full report on Well Health here
Stella Jones (SJ)
As it was when we first added Stella Jones to our Bull List, not many people are talking about this company.
It flies under the radar and it did again despite posting strong quarterly results. Earnings of $1.07 beat by $0.04 and revenue of $842M beat by $90M.
Along with earnings, Stella Jones announced a 5M share buyback. This comes on the back of the company retiring more than 4M shares last year. As it continues to generate strong cash flows, we’d expect this rapid pace of buybacks to continue.
As a reminder, Stella Jones aims to return $500-$600M to shareholders over the next three years in the form of buybacks and dividends. Thus far, it is executing on their strategy quite well as it has been able to pass costs on to customers efficiently, as most of its revenue increases are a result of favorable price adjustments.
While Stella Jones is no longer as cheap as it was when it was first added, it remains an excellent stock. Investors are likely to enjoy growth inline with earnings which is expected to be in the high, single digits. The company is guiding to high single digit growth, but if results continue to be this strong, it is likely guidance is upgraded.
You can read our full report on Stella Jones here
The bad
Disney (DIS)
It wasn’t a great quarter for Disney which suffered one of its largest post-earnings drops in history.
One of the largest companies in the world lost ~14% of its value the day after earnings as profitability was eroded. Earnings of $0.26 missed by $0.30 and revenue of $20.15B missed by $1.29B.
Despite the big misses, it still managed to grow revenue by 8.7% YoY as the company’s Parks segment continues to rebound post-pandemic with growth of 35%. That said, all eyes were on Disney+ as the company downgraded 2024 subscriber growth.
It now expects 215-245 million Disney+ subscribers by the end of 2024, down from its February forecast of 230-260 million. On the bright side, the segment is still expected to achieve profitability within 2 years.
The company recouped about half of its losses in the following days as Disney also announced that it was undergoing cost cutting initiatives which will include layoffs.
To what extent remains to be seen, but this is a trend we are seeing at many companies as we shift from an environment of lavish spending, to one of cost containment.
Intact Financial (IFC)
We wouldn’t exactly come out and say that Intact Financial had a ‘bad’ quarter, but it was soft compared to the company’s usual performance which led to an uncharacteristic ~7% drop in share price.
Net operating income per share came in at $2.70 per share, missing expectations by $0.06. This marks the first time Intact had missed earnings in quite some time and the markets reacted negatively to the report.
The miss was in large part due to lower-than-expected underwriting income and other expenses. Despite this, it was a solid quarter as the combined ratio came in at 92.6% and remains a strong defensive stock to own.
So why did the markets react negatively? For that, we need to zoom out. Intact Financial is one of the best performing financial stocks on the index and despite this year long bear market, had gains of 28% heading into earnings.
It is therefore not surprising to see some profit taking here after an incredible run up. Is Intact Financial cheap? No. That said, it remains well positioned to continue rewarding investors. I (Dan) own it, with zero intentions to sell.
Our report on Intact Financial is currently in the works, we’ll let you know when it’s complete.
Bull List Removals
In light of the current environment, we are taking a hard look at every stock on our Bull List.
Not that we don’t believe in the long term thesis of the stocks we remove, but given current uncertainty we are moving to a neutral stance on the following stocks:
Acuity Ads (AT)
Despite strong performance for Illumin there is still lack of clarity in the ad industry. The company had guided to Fiscal 2022 growth of +20% but given the headwinds facing the industry, the company alluded to the fact that it is unlikely to achieve this level of growth.
The back end 2022 growth was one of the main points in our thesis. And, for the most part, the company has done nothing wrong. It is mostly the macro-economic environment and the significant slowdown in ad spend that is causing issues.
Initially after earnings, which were solid relative to estimates, the stock had increased as much as 18%. However, we have a feeling the conference call and the tempering of expectations in terms of overall growth in Q4 and even into the start of 2023 caused it to selloff at the end of the day.
I (Dan) still hold Acuity, and have no plans of selling at this time. If I feel the stock is a pretty firm hold right now until uncertainty subsides.
Killam Apartment REIT (KMP.UN)
While Killam remains a solid residential REIT, there is no question that growth has slowed. Growth rates are trending down to the average, and it is now trading at the lowest discount to NAV as compared to other residential REITs.
This past quarter, we also started to see the first real impacts of rising rates and inflation on REITs. Same property expenses exceeded NOI growth, interest coverage ratio declined, and it took a $41.3M charge due to loss of fair value on investment properties.
This will be something to watch industry wide. We still believe this to be one of the most well-rounded REITs and Mat has no intentions of selling his position.
