This week, we’ll be going over a Bull List removal and more earnings commentary on stocks featured here at Stocktrades.
But first, let’s dig into my portfolio moves this week.
My portfolio moves
I only made one move this week, and that was to sell off a portion of my position in Starbucks (SBUX).
If you’ve read these newsletters for any extended period of time, you’ll know I was quite bullish on Starbucks when it was in the low $70 range, highlighting that the issues the company is facing should be transitory in nature.
With my additions in the $70 range, my expectations were for a multi-year turnaround in price. Fortunately, with the announcement that Chipotle CEO Brian Niccol would be taking on the CEO position at Starbucks, I was able to realize 30%~ gains on my adds in the low $70s in just a little more than a month.
Don’t take this the wrong way. I’m still bullish on Starbucks.
The decision to trim was primarily an allocation decision. Because of the rapid price increase, Starbucks had become one of the largest positions inside of my portfolio, and I felt trimming it back to a 4.5%~ allocation was more appropriate.
We’re removing Goeasy Ltd (TSE:GSY) from the Bull List
I’m going to go a bit more in-depth on this Bull List removal, as it is a popular stock among members here, and one may wonder why I am removing a company that is producing such strong results.
Goeasy has had a long history on our Bull List, being first highlighted in 2018 at a price of $32 per share. With nearly 500% returns since then, it has outpaced both the TSX and S&P 500 by wide margins.
If you follow Goeasy, you may have noticed over the last few quarters the company is putting up exceptional growth, often 20%+ in terms of both revenue and earnings.
Despite this, its stock price has been relatively flat since April, and in my opinion, this is a direct result of the overall economic situation and the uncertainty about the health of the Canadian consumer.
The subprime market is witnessing explosive growth (see loan origination chart above). Although this is good for Goeasy overall, there is a fine line here. During weaker economies, many consumers who are strapped for cash will head to the subprime market to access more capital.
This is exactly why, if we look to the top performing companies on the TSX over the last couple of years, Goeasy Ltd and Propel Holdings (TSE:PRL), a US-based subprime lender, are among the best performers on the index.
The fine line that exists is that the economy needs to be weak enough to sustain a higher level of consumers tapping into the subprime market but not so weak that consumers start to be unable to pay back loans.
Charge off rates creeping upwards
For this reason, one key element that investors need to keep an eye on for Goeasy is their charge-off rate. A company’s charge-off rate is loans that they have essentially taken off their books and written off as a loss.
It came in at 9.3% on the quarter, which is a 20 basis point (0.2%) increase year-over-year. This is one of the larger bumps in charge-off rates that the company has seen in some time, and it is currently creeping upwards to the top end of their charge-off guidance, that being 10%.
If you pay attention to any of the major banks in terms of earnings, you will know that Goeasy’s charge-off rate is significantly higher. However, with the company charging 30%+ or greater APRs on their loans, it can operate profitably with a much higher charge-off rate.
Credit quality and HELOC loans
Goeasy reported the strongest levels of credit ratings among its borrowers in history. On the surface, this looks like a good thing. However, if you read between the lines, you can probably figure out that it is the likely result of higher quality borrowers, who in normal conditions would never need to tap into the subprime market, are needing to do so.
In addition to this, the company is witnessing 50%+ growth in its Home Equity Line of Credit (HELOC) offerings. This rapid growth in the segment leads me to believe that more and more Canadians are having to tap into their most valuable asset, that being their homes, to access credit.
There is little insight as to why HELOC borrowings are rising. These are often popular loans utilized by Canadians to fund things like vacations or house renovations. However, considering the state of the economy and the scaling back of spending among many Canadian consumers, I have a hunch that these products are increasing in popularity in an attempt to fund everyday life expenses.
The company is fully valued
 |
If Goeasy was trading at a level of discounted valuations, I may view the current situation differently. However, as we can tell by the chart above, the company is trading above its historical 10-year average price-to-earnings ratio.
At this point in time, considering the company is fully valued, in combination with the uncertainty with the economy and the Canadian consumer overall, I feel it is best to remove it from the Bull List.
If you’re long Goeasy, what should you do?
Goeasy has navigated numerous situations like this in the past. The dot-com bubble, financial crisis, and COVID-19 pandemic. Make no mistake about it, this is an exceptional company.
I have little doubt it will be able to navigate the current economic environment. If the Bank of Canada can navigate their way through the health of the current Canadian consumer and steer toward a somewhat soft landing, there is a chance none of the issues above ever become a material issue for Goeasy.
In that situation, it is likely the company will grow in line with its current earnings growth, and all of the concerns will be for nothing.
However, in the event the Canadian economy does continue to weaken and we see charge-off rates rise, there would likely be significant volatility in the company’s share price despite the fact that it has a strong history of navigating through environments like this.
For this reason, I’d view the company as a firm hold at this point in time, and I’d suggest that investors take a look at their overall allocations to the company based on their risk tolerance and adjust accordingly if needed.
Earnings
Granite REIT (TSE:GRT.UN)
The struggles of many major Canadian REITs continue, and despite Granite’s blue-chip nature, it is not immune to industry-wide slowdowns.
The company has grown net operating income by 6.9% on a year-over-year basis, and adjusted funds from operations have grown by 5.7% over the same timeframe. These are certainly strong amounts considering the overall environment. However, the company has typically been able to grow AFFO at a high single-digit pace, so it’s a bit lower than what investors have come to expect from Granite.
Payout ratios continue to trend downward. As it looks right now, there is virtually no danger for Granite to cut the distribution despite an industry-wide slowdown and lower occupancy levels, which I’ll get to in a bit. The company’s payout ratio compared to its AFFO came in at 69%, which is down from 71% at the same time last year.
The company’s debt structure remains one of the best in the business, with a net leverage ratio of 32%, down 1% year-over-year, and interest coverage ratios of 5.4X compared to 5.5X last year. The one headwind we may see here is that the company’s weighted average cost of debt is 2.6%, with an average maturity date of 3.4 years.
If rates were to continue to stay elevated for extended periods of time, this debt would no doubt be refinanced at higher rates, ultimately impacting the bottom line
|
The company’s number of properties stayed flat at 143, and its occupancy numbers fell from 95% to 94.5%. These are still some of the best occupancy rates among all industrial REITs; however, pre-pandemic Granite routinely had occupancy rates over 99%.
Because of these new vacancy levels, the company has been forced to adjust its guidance downward regarding funds from operations. This was stapled all over the headline news in terms of Granite’s quarter. However, when you dig into how much the reduction in guidance was, it was practically a non-issue, and is simply the company trying to be as transparent as possible.
They now expect to produce adjusted funds from operations of $4.60-$4.70, whereas previous guidance targeted $4.60-$4.75. This small 5-cent reduction in guidance works out to be a 1% reduction in overall expected AFFO, resulting primarily from a half-percent decrease in occupancy. Over the long term, this small reduction in guidance will be quickly forgotten by investors.
Overall, the REIT landscape hasn’t quite turned around yet. When it does, Granite is, in our opinion, in the best position to benefit.
Home Depot (HD)
All things considered, Home Depot reported a strong second quarter of 2024. Revenue of $43.18B came in higher than the expected $43B, and earnings per share of $4.60 topped estimates by 11 cents per share.
There are plenty of macroeconomic headwinds impacting Home Depot right now, and a softening US consumer is at the top of the list. People are spending less and less, and one of the main cuts to consumer spending is discretionary spending. Home improvement projects fall in that category.
|
As a result, same-store sales are down 3.3% company-wide, with the US feeling the pinch even further, with same-store sales down 3.8%. Total customer transactions fell by 1.8%, and average ticket price fell by 1.3%. An important thing to note also is that customer transactions fell by around 0.5% more than what we’ve been used to seeing from the company over the last while, indicating that pressures are continuing to mount on consumers.
Operating income was flat, margins stayed steady, and earnings per share came in a penny lower on a year-over-year basis.
All of this may sound relatively negative. However, it’s important to understand that consumer cyclical stocks, by their nature, will be cyclical. The fact that Home Depot is putting up the numbers it is in the current environment we’re in is, in my opinion, bullish and not bearish.
Despite a monumental slowdown in consumer spending in North America, this company has managed to keep earnings stable and revenues growing at a low-single-digit pace. When the economy inevitably improves and people get back to spending, Home Depot should be able to reap the benefits.
The company issued guidance in which it expects sales to increase by 2.5-3.5% in FY 2024. However, this includes an extra week of sales, so realistically, when we factor in inflation, and the added week of sales, there will be little growth from Home Depot in 2024. The company expects comparable sales to decline by 3-4%, which means, for the most part, the bump in sales will come from the 12~ new stores it expects to open.
Finally, they expect earnings to fall by 1-3% on a year-over-year basis, and this includes the additional week of sales. So, apples-to-apples earnings are likely to drop a bit more than this.
Considering the circumstances, it was a strong quarter, and I’ll be happy to continue accumulating shares in Home Depot while prices remain low.
TMX Group (TSE:X)
TMX Group had a relatively inline second quarter. Revenue of $367M topped expectations of $360M, and earnings per share of $0.43 came in ahead of estimates for $0.42. On a year-over-year basis, revenue is up by 20% and earnings per share by 13%.
|
If we isolate out the acquisition of VettaFi, the company was still able to grow organically by 9% on a year-over-year basis, primarily driven by strong options activity and its Trayport segment.
Despite significant market-related headwinds, the company continues to put up solid results. Although volumes have improved a touch, and more investors are starting to come back to the markets, it is still difficult in terms of new listing activity.
Initial listing fees continue to decline on a year-over-year basis. However, additional listing fees, which would be the fees TMX charges if a company would like to issue newer shares to market, saw a bit of an improvement on a year-over-year basis. We’re still not anywhere near the pandemic-level highs, but we’re slowly inching our way back towards it.
The company’s equities and fixed-income trading revenue segment is also seeing strong double-digit growth on a year-over-year basis. This isn’t all that surprising as the markets have generally exceeded many expectations in 2024. And as the markets go up, we’re bound to see more trading activity.
The shining star of the company has no doubt been its Trayport segment, which is an energy-based trading platform the company acquired in 2017 that has posted its sixth consecutive quarter of double-digit sales growth. The segment is well on its way to becoming the largest revenue generator in TMX Group’s Insights and Analytics department, and I would not be surprised to see it do so as soon as next quarter.
Overall, the company keeps firing on all cylinders. If rate declines continue in the future, we could see additional listing activity on its markets which will provide yet another tailwind.
