In this week’s newsletter, I’m going to go over a few moves I made in my portfolio and then wrap it up with some earnings commentary on some stragglers in terms of highlighted companies.
But first, I want to detail the holiday newsletter schedule here at Premium.
Holiday newsletter schedule
The holidays line up quite well this year, and I will only be taking a single week off from delivery. Here is what the holiday schedule will look like:
December 22nd: No Newsletter
December 29th: 2024 Year in Review Newsletter (Premium review plus commentary on my own portfolio)
January 5th: 2025 Canadian Foundational Stock Release
January 12th: 2025 US Foundational Stock Release
So, because there will be no Sunday newsletter next week, I’d like to take the time to wish you happy holidays and thank you for sticking with us for yet another year.
2025 will mark our 8th anniversary of Stocktrades Premium. Even with the platform being that old, we’re still continually improving it (our brand new screeners in 2024 as an example). We will continue to make improvements in 2025 to enhance your value as a member.
Again, happy holidays, and see you in the new year!
My portfolio moves this week
I made a few moves this week, including some notable ones that people will likely want to hear about.
I ended up trimming back my Royal Bank (TSE:RY) and National Bank (TSE:NA) positions. I did this for a couple of reasons.
For one, and this is the main reason, I was getting a bit too overallocated to the financial sector. When we look to the runups of the financial companies I own in 2024:
BLK: 33.5% BRK.B: 28.59% IFC: 31.08% RY: 37.57% EQB: 16.88% NA: 36.94% AD.UN: 27.34% BN: 59.40%
It makes perfect sense for me to trim some financial holdings.
Why Royal and National? First, explaining why I didn’t sell Blackrock is pretty easy. If you remember, I trimmed that one about a month ago to free up some cash to buy ASML Holdings.
Secondly, I do feel that Royal and National are the most “fully valued” of any companies on the list above. And yes, that is with Brookfield returning nearly 60% on the year.
Royal Bank is trading at near 15-year highs in terms of overall valuations (see the chart below).
Barring any changes thesis-wise, which is unlikely with a major Canadian bank, Royal will continue to hold a core position in my portfolio for a long time. However, when I’m looking to re-balance (something I do routinely at a year’s end), valuation is going to be my number one factor.
For National, the valuation isn’t nearly as high as Royal. However, again, on a relative basis compared to my other financial holdings, I felt it was a pretty easy one to trim back.
Keep in mind, I didn’t really trim these back all that much. I took Royal Bank down from a 3.4% position to 2.5% and reduced National from a 3.5% position to 2.9%.
I’m saying this because I don’t want anyone to get the impression I’m highlighting to members that they should be selling the banks. Banks are still strong core holdings. However, in my own individual situation, I was heavily exposed to the financial sector after an outstanding runup, and have no problems taking profits.
I made no other moves this week
I’ve been accumulating capital inside of my registered account for a few weeks now with my weekly contributions, and I won’t be buying anything until the new year. This is primarily because I am saving up for my TFSA contribution room on January 1st 2025. Once that is contributed, I will be adding to more positions inside of my TFSA.
There is a chance I sell off equities inside of my unregistered accounts for tax loss purposes and for just the overall shuffling of capital due to a new year of contribution room in registered accounts. None of these moves will have material impacts on my portfolio overall, so I will probably forego commentary on them to avoid confusing members.
Earnings
Equitable Bank (TSE:EQB)
After a long streak of rock-solid quarters, Equitable Bank reported what I feel is its weakest quarter in years. In fact, this was one of the larger misses in earnings relative to estimates I have witnessed since I started covering the company in 2019.
However, it’s certainly not doom and gloom, and the bulk of the miss was from likely one-time provisions when it comes to an equipment company the company loaned capital to that is in a bit of financial difficulty.
Earnings per share of $2.51 missed expectations for $2.909, and revenue of $321M came in just shy of the $325M estimated.
Before I get into the overall results on the year, I’ll speak on the provisions. Provisions for credit losses increased to just under $90M in Fiscal 2024, and a large booking of PCLs in the fourth quarter is what caused the earnings miss primarily. The bright spot is that 71% of those PCLs came from a single company, the Pride Group, a trucking and logistics company currently going bankrupt.
Because of this, the spike in provisions is likely to be a one-off, and the company should get back on track in terms of earnings growth in 2025.
When we look to full-year numbers, the bank closed out the year with EPS of $11.03 and customer growth of 28%. The bank now has over 513,000 customers (see chart below) and is continually growing its base on the back of rock-solid new products.
The company’s assets under management grew by 14% year over year, and book value per share now sits at $77.51, a double-digit increase.
As mentioned above, the company bumped the dividend by 4.2%, a historically lower number than we are used to. I do believe it is because of those higher provisions.
The bank’s CET 1 ratio sits at 14.3%, making it one of the better-capitalized banks in the country, and its 15% return on equity in 2024 is also right up there with some of the best-performing Canadian institutions like Royal Bank.
Overall, it was a strong year from Equitable, overshadowed by some one-time provisions that should be forgotten about in 2025 as it continues to carve out its path as a challenger bank. I continue to hold the company and will continue to add to my position for the long term.
You can read my report on Equitable Bank here
BRP Inc (TSE:DOO)
BRP posted a much better Q3 than expected. Because of the large-scale drawdown in the company’s business due to the economic decline, analysts have had the bar set pretty low for the company. Earnings per share of $1.16 came in 50% higher than estimates, and revenue of $1.95B topped expectations by 3%.
The most notable thing on the quarter for BRP is that it didn’t decrease its guidance. For the last 3 quarters, the company has had to come out and reduce its guidance because of the overall economic uncertainty. Not reducing it this quarter gives a bit of reassurance that the company now knows what to expect from the current economy.
The company anticipates a decline in year-round products by 20-22% and a steeper 30-32% drop in seasonal products. Despite this, inventories are beginning to normalize after elevated dealership stock levels disrupted new product production. Over the last three quarters, network inventories have decreased by 10%, with further normalization expected.
Free cash flow has been another weak point, falling over 71% in the first nine months of the year, even with reduced capital expenditures. This highlights the challenges the company faces in the current economic climate. However, a strategic decision to sell its marine business in October should be a pivotal move.
By focusing on its higher-margin powersports segment, BRP expects an approximate $225 million revenue impact in fiscal 2025 but anticipates immediate improvements in EBITDA, earnings, and free cash flow.
The tough results are not entirely unexpected, given the macroeconomic backdrop. As a long-term holder of BRP, I remain confident in its ability to navigate this downturn. External factors like high interest rates continue to weigh on consumer spending, but these are largely out of the company’s control.
Looking ahead, I expect BRP to prioritize share buybacks as a key capital allocation strategy.
While some may question this move given the company’s nearly 30x trailing P/E ratio, it aligns with the cyclical stock investment principle I explain in the valuation section: buy during high P/E periods (typically at the bottom of a cycle) and sell during low P/E periods (usually at the peak).
You can read the full report on BRP Inc here
Costco (COST)
Costco kicked off Fiscal 2025 on a high note, and it seems like there isn’t much that can stop this company right now. Earnings per share of $4.04 topped expectations of $3.78, and revenue of $62.15B came in ahead of expectations for $62B.
As we’ve stated for the two retailers highlighted here at Premium (Costco and Loblaw), there seems to be no slowing down the monumental shift of consumer habits when it comes to grocery spending.
Same-store sales increased by 7.2% in the United States, 6.7% in Canada, and 7.1% internationally. These growth rates from a defensive retailer like Costco are exceptional. The growth is primarily driven by customers continuing to renew and shop at the stores, but also new members heading into the stores driving additional tailwinds. Membership fees grew by 7.7% year-over-year, not only on the back of new memberships but also an increase in membership fees.
The company’s success in a post-pandemic environment is evident. Household card members have grown from 47.4M to 61.4M in its most recent quarter, a 30% increase and a 6.3% compound annual growth rate over that timeframe. When you consider that once a consumer becomes a member, they stay a member (backed by a 93%+ renewal rate), every single customer they add is likely to become a continual contributor to the bottom line of the company.
Earnings per share are up 13% year-over-year, and E-commerce growth is up the same amount.
Overall, it was an outstanding first quarter from Costco, which continues to drive exceptional growth despite being a more defensive, lower-margin retailer.
The difficulty here now lies in valuation. The company is currently trading at 52x expected earnings. When we first added Costco to the Foundational Stocks list, it was trading at 34x trailing earnings. Its valuation multiple has now expanded to 60x earnings, which is bordering on too expensive at this point.
