This week’s newsletter will comprise my moves for the week and some earnings reports from companies we cover here at Premium.
One of our most popular newsletters is coming up next week – Our Canadian Bank Earnings Recap email is coming out after they all report in early December. This is one of the most popular newsletter issues on the platform, and you won’t want to miss it.
What a November
To say November was a strong month would be an understatement. My portfolio earned north of 7% returns on the month, marking the biggest monthly increase since January 2023.
As I see numerous investors across social media platforms flashing YTD returns and speaking on how 2024 has changed their lives, I tend to take a more level-headed approach, understanding that at some point, the markets will revert back to providing their 8%-10% annualized returns that they’ve provided for more than a century.
How this happens is anyone’s guess. It could be the easier route of a flat market for multiple years, allowing stock earnings to grow into current valuations. Or, it could be the more difficult yet more “band-aid theory” way of a harsh correction or crash.
As the saying always goes, the markets tend to take the stairs up but the elevator down.
During exceptional years like this, it’s important to enjoy the returns, but also acknowledge that years like this are a rarity. Where I see many investors slip up is they structure their portfolios to try and achieve these returns consistently. I call this “chasing returns,” which tends to be the death of a well-structured investment portfolio.
My portfolio moves
As you know from my email last week, my next big move will be to add a core position in ASML holdings on Monday.
However, I made a few noteworthy moves this week. So let’s discuss.
I trimmed my position in US Foundational Stock Blackrock (BLK)
It is easy to get greedy and try to let things run up price-wise. However, when you think logically and conclude that markets simply cannot keep doing this forever, it becomes relatively easy to trim back on particular positions.
Blackrock was one of those positions. This is still one of my favourite companies in the United States. However, it had run up to roughly 6.6% of my portfolio, and I felt trimming back to 5% (which is what I would typically target for a company like Blackrock) was the best thing to do.
I sold my TELUS International (TSE:TIXT) position
I had traded in and out of TELUS International a few times since its IPO, managing to book some profits along the way.
However, my final purchase of the company didn’t end up working out all that well, as tech spending in their particular sector (digital design, customer service etc.) absolutely collapsed.
TIXT has gone from the largest technology IPO on the TSX Index to one of the biggest IPO disasters on the TSX in very short order.
My sale this month was solely from a tax-loss perspective. I need some of the capital losses to offset a sizable chunk of capital gains I have in my cash account when I inevitably contribute a chunk of my cash account into my TFSA/RRSP at the start of the year.
TIXT is an interesting one. With the company hitting $40~ per share during COVID and now falling all the way down to $5, it would make sense for TELUS to simply buy the company back.
Sure, it would leave a lot of investors frustrated and potentially some trust damaged. But, it would likely be the best move for TELUS, which does leave me tempted to buy it back in 30 days, in hopes of a TELUS buyout.
Earnings
Alimentation Couche-Tard (TSE:ATD.TO)
Couche-Tard reported yet another soft quarter. Revenue of $24.25B came in below expectations for $25.1B, and earnings per share of $1.03 missed estimates for $1.077.
However, the company’s share price has reacted positively since the earnings report, and this is likely due to the fact its attempted acquisition of Seven & i Holdings seems to be dead in the water, with Seven & i Holdings being taken private via a $52B deal.
On a year-over-year basis, earnings are down by 9.8%, and revenue is up by 6%. The difficulty here is that sales expenses are up by 12.5%, more than offsetting the boost in revenues.
Merchandise gross margins dipped in practically every geographical region of the business, and same-store sales declined by 1.6% in the US, 1.5% in Europe, and 2.3% in Canada.
Overall, same-store fuel volumes remained relatively flat in Canada and Europe, while they fell by 2.2% in the US. Fuel margins continue to dip as well, down by 7% year over year in the US and 2.1% in Canada.
Overall, it was a pretty weak but also an expected quarter from Couche-Tard. People are travelling less, pinching pennies, and spending less.
The impact to convenience stores comes from multiple angles. For one, less fuel means less merchandise purchases as well, as the vast majority of consumers will buy merchandise after fueling.
Secondly, convenience stores are meant for convenience, not price. When times get tighter, someone may run to their local grocery store for their creamer, eggs, or whatever else they need that they may be paying more for at the convenience store.
As I’ve always stated, cyclical stocks will no doubt be cyclical, and Couche-Tard is still an outstanding buy and hold for the long term here in my opinion. One just needs to be patient.
Alaris Equity Partners (TSE:AD.UN)
It has been a heck of a year for Alaris, and it is really nice to see a company added to the Bull List as a value option come to fruition. The company is up 64% since November 2023.
Alaris posted a strong third quarter. In terms of estimates, it blew them out of the water.
However, the important thing to understand about this is that it was primarily due to the early payment of some distributions, and some partners that had been struggling are now able to pay those distributions. It is unlikely that results consistently come in materially higher than expectations, and this is certainly a one-off.
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Earnings per unit came in at $1.37, which is a 4.6% increase on a year-over-year basis. Through the first 9 months of the year, the company has increased earnings per unit by 9.3%, which is a higher than normal growth rate for the company.
This is likely due to the rate declines in the United States and the recovery of many of its partners that were having some difficulties in 2023.
The company reported adjusted EBITDA of $89.5M, which was 12.4% higher than the third quarter of last year. Through the first 9 months of 2024, the company has grown adjusted EBITDA by 6.7% compared to the first 9 months of 2023.
The primary focus of my earnings commentary on Alaris is often the health of its underlying partners. Ultimately, this is what drives the business. Its portfolio continues to get healthier, with 7 of its top 8 partners growing their year-over-year revenue and 6 of the 8 reporting increases in year-over-year EBITDA.
I’ve attached a chart below with its current partner base.
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The company now has only 2 partners out of 19 with earnings coverage ratios of under 1x, meaning they don’t earn enough to cover the distribution payments required to Alaris. However, it is important to note that one of those partners did end up making its distribution payment this quarter, meaning that the situation is probably improving for them.
It is also important to note that the two partners still facing some difficulties when it comes to payments make up less than 5% of the total run rate revenue for Alaris. Virtually all of its partners that account for double-digit revenue run rates have earnings coverage ratios in excess of 1.2x with growing revenue and EBITDA.
A final note on book value: The company increased book value to $22.80~ on the quarter, and it currently trades at $19.50~ a share. Historically, this company has not traded at book value but has been pretty close. So, I still believe there is upside potential here to go along with a well-covered and high-yielding distribution.
You can view my full report on Alaris here
Exchange Income Corp (TSE:EIF)
After reporting a relatively soft quarter last report, Exchange Income rebounded in Q3. Although revenue of $710M missed expectations for $745M, earnings per share of $1.29 came in well ahead of expectations for $1.20.
Adjusted EBITDA grew 25% year-over-year and free cash flow came in 16% higher over the same timeframe.
The company has laid out a lot of capital expenditures over the last few years (see the chart below) to improve the efficiency and operations of the business, and we’re starting to see those improvements now.
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The company has won numerous contracts in its Aviation segment that are vaulting results at this point in time. With the investments made in its current and new aircraft, it should be in one of the best positions out of its competitors (there aren’t many) to acquire new contracts in the future.
Its manufacturing segment, on the other hand, is lagging a bit. A lot of the businesses inside of this segment are highly cyclical and exposed to the weaker economy. A prime example would be the company’s highrise window cleaning business. It witnessed a decline in revenue in this segment, likely attributed to a reduction in spending from many corporations.
It also reported a decline in its Precision Metal and Engineering business, but again, I’d attribute most of that to the cyclical nature of the economy, whereas things like Medivac services are more of an essential need.
Overall, the company is operating quite well, and I’m not overly concerned with the large miss on revenue expectations.
The company stated, with confidence, that its Adjusted EBITDA should come in the range of $690M-$730M next year. Considering last year the company reported Adjusted EBITDA of $556M, this would represent a 24% boost on the low end of that guidance.
The Aviation segment remains strong, while the Manufacturing segment will no doubt pick up on a rebound in economic activity. I’m willing to be patient here.
