It’s been a while since we’ve faced any volatility. Both the NASDAQ and the S&P 500 pulled back this week. However, the TSX managed to tread water and put up relatively flat returns.
Over the last year, the TSX has been the best-performing major index, with returns in excess of 21%. However, many members might not be feeling a lot of those gains. The reality of the situation is that if you did not have extensive exposure to the material sector, whether it be gold, silver, or any other precious metal, your gains are likely much lower.
The TSX Composite Index is around 14%~ basic material stocks, which would contain many of the industries I listed above. You would be hard-pressed to find an investor that has this high of exposure to the sector. So, if you’re feeling down about your returns overall due to the strength of the TSX, I wouldn’t worry too much.
Over the long term, due to the cyclical nature of the sector, basic materials have provided relatively lackluster returns.
On the flip side, if you do have heavy exposure to basic materials, primarily gold, you’re probably doing exceptionally well this year, and congrats!
This week’s newsletter will primarily be a simple move I made in my portfolio this week, along with earnings recaps from some key companies that are highlighted here at Stocktrades Premium. One I want you to pay particularly close attention to is one I am particularly bullish on over the long term, and one I have been quietly accumulating for years now in the event of a turnaround in consumer spending south of the border.
Let’s get into it.
My Portfolio Moves
I made one transaction this week, and that was adding to my Boyd Group Services (TSE:BYD) position.
I will spare the details of why I added in this newsletter and instead suggest you read last week’s earnings summary, and my Value Call report back in June, which gives my in-depth thesis on why I believe Boyd will continue to be a long-term compounder after some industry headwinds subside.
I am in no rush for shares to increase in price here. Their latest quarter sent the stock up by about 17% post-earnings, but the more I can accumulate shares in a rough environment with this company, the more I believe I will be rewarded in the future.
My investment style often reflects these types of companies. While many investors pour into AI-related stocks that I believe are priced to perfection, I tend to look at the beaten-up areas of the market to find value.
Earnings
Home Depot (HD)
Home Depot’s second quarter results were steady, which is exactly what I’d like to see in the current macro-environment.
I’ve been slowly adding to my position in this company over the years with the expectation that pent up demand for home renovations will eventually come loose on falling interest rates. I’ve often stated here that Home Depot is my “longest term” thesis and the longer the stock stays cheap, the more shares I can accumulate at discounted prices.
Revenue grew 4.9% year over year to $45.3 billion, driven by a return to positive comparable sales growth and contributions from the SRS acquisition. SRS is a building product distributor that Home Depot acquired last year for $18.25B.
Comparable sales rose 1.0% overall and 1.4% in the US.
This is a very important piece of data investors can take away from the quarter.
Why? This was the company’s largest comparable sales growth since October of 2022. Sure, 1% isn’t anything to write home about. However as long-term investors, what we’re really looking for is a turnaround in the spending habits of American consumers, as this quarter might have given us a bit of an indication they could be loosening the grips on their wallets.
Management mentioned a pickup in customer engagement across both their contracting and do-it-yourself segments, with 12 of 16 departments delivering positive comparable sales, which as I’ve mentioned is the best quarter they’ve posted in nearly 3 years. Seasonal categories always help during the summer time, but the company posted better than expected results in categories like building materials, hardware, and plumbing.
Average ticket price increased by 1.4%, which is the average amount the customer spends when they go in the store.
Although growth is nice here, it is effectively just offsetting the inflationary situation on some commodities and just prices in general.
Where the quarter really stood out is in the execution and expansion of Home Depot’s Pro ecosystem, primarily through SRS. The SRS acquisition continues to exceed expectations, and management is clearly seeing some opportunities on the acquisition front, as it is eying yet another “boring” building material company in an effort to expand its market share and get more exposure to contractors.
GMS, which is the company they are looking to acquire, sells products like drywall, ceilings, steel framing. However, the interesting thing here is the company has a large fleet of delivery vehicles and logistics networks. If the company can expand its delivery network, it will ultimately become the building supplier of choice due to convenience. Contractors do not like going to and from the store consistently.
There was some comments from management that confirm the environment is still rough, however. They mention that large discretionary projects remain on hold, primarily due to rate sensitivity and general economic uncertainty. We can even look to something like the company’s Decor sales, which would not doubt be discretionary items. It is struggling, but should pick up when consumers are willing to spend again.
They’re also confident that what they are seeing is deferrals, not cancellations. This is my main bull case for Home Depot. Pent up demand.
The recently passed tax reform package and potential rate relief later this year could help loosen up some of that demand. The prudent thing here is that Home Depot is factoring none of that into its guidance. If it does by chance happen, it is simply a bonus.
- Sales are expected to grow 2.8%, with comparable sales up about 1%
- Gross margins should be maintained around 33.4%
- Operating margins should come in at 13.4%
- Earnings are likely to fall by 2%
As I mentioned above, this is guidance that clearly doesn’t take the potential impacts of a surge in activity once rates decline. However, I’d rather them under-promise and over deliver.
This wasn’t a blowout quarter, but that’s not the point. Home Depot is playing the long game, and so am I with my position.
Constellation Software (TSE:CSU)
Constellation Software continues to post results that put it right up there with the top echelon of US tech names. Revenue increased 15% year-over-year and and free cash flow per share increased by 21%.
The most interesting thing on the quarter was the company’s organic growth rate came in at the highest levels it has witnessed since 2023 at 5%.
What you might notice is earnings took a pretty big hit, with net income falling 68%. However, this was mainly due to some liabilities it owes to acquisitions it made in which the founders are still on board and have equity stakes.
In the simplest explanation possible, it owes a bit more money to those members as the value of the companies it acquired has increased, and they have had to re-evaluate the companies, and thus the liabilities are higher.
Maintenance and other recurring revenues increased by 18% to $2.14B and made up 75% of the company’s total revenue.
Professional Services rose 7%, and Hardware jumped 18%. Although these are smaller segments of the company, to see high single digit and low double digit growth is definitely a strong sign.
Acquisition activity remains high, with $469M CAD deployed across acquisitions this quarter. The company continues to absorb niche vertical market software businesses at an exceptional pace, despite management warning of potential future slowdowns.
Cash flow is the real story here. I wouldn’t get too caught up in the noise in regards to earnings. With free cash flow increased by 20%+ and operating cash flow increasing by more than 30%, the company’s strategy and important operating numbers are just fine. In fact, they’re outstanding.
Commentary from management suggests a continued focus on disciplined acquisitions. With the company having over $2.6B in cash, it has a lot of dry powder, which I’m perfectly fine with.
I’d rather them be patient instead of spending an extensive amount of its cash balance on acquisitions just because it can.
While earnings volatility from accounting charges may persist, the company at its core is firing on all cylinders, and in my opinion it remains a cornerstone of my portfolio and the best technology stock in the country.
Topicus (TSEV:TOI)
Topicus delivered another quarter of strong growth, with sales growing 20% year-over-year to €372 million. Organic growth came in at 5%, which is relatively inline with what the company has posted over the last 12-15 months.
It is no surprise that 15%~ of the 20% top line growth came via acquisition, as this company is, at its core, a serial acquirer.
Net income increased 54% to €41.5 million, with earnings per share climbing from €0.21 to €0.31. However, as I’ve mentioned a few times with Topicus, I don’t spend too much time on earnings and instead focus on the cash flow generation of the company, as it is the more accurate picture of profitability.
There was some flags on the quarter in regards to cash flow, but if you understand the business well, they aren’t all that surprising. Operating cash flow in Q2 was negative €14.9 million, a large swing from the €8.8 million generated in the same quarter last year.
Free cash flow available to shareholders (FCFA2S) also turned negative, coming in at –€16.7 million versus –€3.8 million a year ago.
For many, this would cause panic. Why is the company reporting losses? I thought it was supposed to be profitable? Well, if you look to an annual chart of Topicus’s free cash flow generation, it starts to paint a better picture.
Topicus tends to book and collect a large portion of maintenance revenue early in the year, and Q2 typically is its worse cash-flow generating quarter on the year. If you look to the chart above, you’ll see that there is a large surge (Q1) followed by a large dip (Q2, the quarters highlighted by red boxes.)
The best way to confirm this narrative is to simply look at TTM metrics or 6 months metrics. For the first half of 2025, operating cash flow increased 9% to €256.5 million and free cash flow rose 11% to €145 million.
The company continues to deploy capital at a high rate, putting €240.8 million towards acquisitions, made up of €210.3 million in cash and €30.5 million in deferred consideration.
That’s a big step up in terms of previous years, and it helps explain why cash flow looked tight despite solid underlying operations. It also underscores my main thesis with Topicus. Scale aggressively while the European VMS market remains discounted relative to the US side. The trade-off, of course, is increased near-term pressure on cash flows.
Much like Constellation, the lack of a conference call means there isn’t much to talk about outside of the raw numbers, but the message is pretty clear here. Topicus is doubling down on its growth, and I’m very confident the management team will be able to deploy capital into profitable VMS companies and merge them into the fold.
That said, if you were shocked by the negative cash flows reported on the quarter, just know this is a routine thing.
