Volatility continues to reign supreme as the stock markets went through somewhat of a false rally on low volume. We saw the NASDAQ and other major indexes jump anywhere from 2.5-3.5% on Tuesday, but the markets ended up giving most of it back to close out the week.
Now more than ever, a long-term mentality needs to be taken with your holdings. With inflation coming in at over 7.9%, the markets are now entering a year-long timeline of negative real returns (real returns meaning after inflation is factored in).
What this means is that if you had invested in any other major index other than the TSX over the last year, you’ve lost buying power. On the other hand, 1-year gains of 14% on the TSX are admirable. However, if we consider the bulk of this has come from energy and material plays, you would have needed to be overweight in commodities to realize the bulk of these gains.
Or… have been invested in our Foundational Stocks of course
Over the last calendar year, not only has our list of 11 Canadian Foundational stocks doubled the performance of the TSX, but they have outperformed the S&P 500 by 4x and outpaced the NASDAQ by over 33%.
It has been an exceptional year for this group of stocks, and they have had a rock-solid start to 2022 as well, outperforming all major North American indexes. What’s fueling these stocks? We believe it to be the primary reasons we place them on the list in the first place. Large moats, pricing power, and brand recognition. 3 key factors for a company in an inflationary environment.
If you haven’t been with us long, here’s a refresher on our Canadian Foundational Stocks for 2022. These make up a large chunk of both Mat and I’s portfolios, and are the cornerstone of Stocktrades Premium.
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Premium earnings
Earnings season is starting to wind down. With that said, we are happy to be exiting the first quarter. It hasn’t been an easy investment environment given the macro events that are currently impacting the markets.
We do feel that the markets will start to stabilize a bit once the Fed announces it will raise rates. It has made it quite obvious it wants to raise and should be doing so on Wednesday. Although increasing rates is poor for the markets overall, this raise is likely long priced in and action by the Fed may reduce uncertainty, and thus volatility.
One of the sectors most negatively impacted has been technology. It has been even more difficult for high-growth and small caps. This leads us to Acuity Ads Holdings (AT.TO), the lone stock from our Growth Bull List to report earnings.
Acuity Ads Holdings
In the fourth quarter, Acuity posted mixed results. Earnings of $0.066 and EBITDA of $5.872M missed estimates by 2.94% and 12.76% respectively, while revenue of $36.8M beat by 1.07%.
The company warned in previous quarters that the macro environment was impacting ad spending in key industries. Namely, automotive and tourism.
Despite these headwinds, the company’s newest flagship platform Illumin continues to make headway. It accounted for $10.2M in revenue in the fourth quarter, up 37% sequentially and total revenue still grew YoY. The other bit of good news, is that the company exited the quarter in strong cash position $102M and guided to 20-25% top line growth in Fiscal 2022.
In our opinion, the selloff is overdone but it will likely take a macro sentiment shift for it to regain upside momentum. Prior to the pandemic, hospitality and tourism made up 30% of Acuity’s revenue. As of right now, it makes up 3%. This slowdown is impacting the company but certainly won’t last forever.
I (Dan) own Acuity and will continue to dollar cost average into this stock for the long term.
You can read our updated report of Acuity here
Alaris Equity Partners
Switching gears to our Dividend Bull List, Alaris Equity Partners (AD.UN) was the lone company to report earnings. It delivered strong results yet again as earnings per share of $0.97 represented 21% growth YoY and revenue of $37.64M topped estimates and grew by 18%. The book value of its underlying investments jumped by 7% to $17.93 per share.
At ~7%, Alaris is one of the safest high-yield options for investors, and one I (Dan) bought relatively quickly after our addition of the company to the Bull List. The company’s payout ratio against cash flows came in at only 53% while the rest was used to re-invest and pay down debt. Overall, it was another strong quarter and it remains attractively valued at these prices.
You can read our updated report of Alaris Equity Partners here
Foundational Stock earnings
The other two stocks to report last week were Foundational Stock mainstays Granite REIT (GRT.UN) and Franco Nevada (FNV). Let’s start with Granite, which delivered strong results yet again.
Revenue of $105.3M beat by $3.7M while funds from operations of $1.02 per share jumped by 2% year over year. In the quarter, it closed on another five acquisitions with a combined total value of approximately $311 million. There wasn’t much to get excited about this quarter, just another steady performance. Worth noting, however, the company had $1.3B in total liquidity and remains one of the best-capitalized REITs in the sector.
For its part, Franco Nevada delivered mixed results. Earnings of $0.86 missed by a penny while revenue of $327.7M beat by $10M. As a gold stock, and one that has high, single-digit exposure to oil, Franco-Nevada is one of the few companies delivering strong returns in this environment. Up by ~16% year to date, FNVs performance is a good reminder why we like to have exposure to gold – as a hedge against volatility. While many are scrambling to get commodity exposure in their portfolios right now, we prefer to simply hold it long-term.
Looking forward, Franco Nevada expects lower GEO (Gold Equivalent Ounce) sales in Fiscal 2022 before returning to growth in 2023 through to 2026. As a royalty company, FNV is somewhat protected against inflation and as a result, “top-line growth translated directly into expanded margins and record earnings.” It remains debt-free and continues to print cash. All in all, it was a record year for FNV and with $1.6B in available capital. It is well-positioned to continue growing that dividend all while funding growth with internal cash flows.
In our opinion, it remains one of the best stocks to own in the industry.
Two popular Canadian small-caps get clobbered
For the most part this quarter it has been US-based companies that have seen significant swings to the downside post-earnings. However this week it was two Canadian small caps in NFI Group (TSE:NFI), and Pollard Banknote (TSE:PBL).
Let’s dig into both of these companies and see whether the large drops present opportunities, or if they were justified.
NFI Group
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Although NFI Group isn’t a company we cover extensively here at Premium, we had been asked about it a few times in the Q&A and on the Discord.
Our main fear with the company was its dividend. It was cut during the COVID-19 pandemic, and it was teetering on the verge of being cut again. Here was our commentary on the company in late 2021:
“The company has stated that the dividend will be maintained through this. However, the issue is that NFI Group is only about 16 months removed from slashing its dividend in the heat of the pandemic. So, I don’t think much reliance is being placed on the company’s confirmation of the dividend at this point.”
And unfortunately, this statement ended up being true. After reiterating the safety of the dividend in late 2021, NFI cut the dividend another 75% when it reported earnings on March 10th.
The company posted much larger losses than expected on the quarter and missed EBITDA estimates by a double-digit margin. Obviously, the results and slash to the dividend were not kind to the stock price and it’s down 22% post-earnings.
The situation with NFI Group is a prime example of why you must take everything management states with a grain of salt. We witnessed this with RioCan in 2020, as management said the distribution would not be cut, and it was cut months later.
NFI’s payout ratio when it comes to free cash flow had ballooned to 153% in 2021 and 216% in 2022. It was almost a near certainty the dividend was unsustainable unless operations turned around very quickly.
In 2019, NFI group generated $3.42 in free cash flow per share. In 2021, it closed out the year with $0.41 in FCF per share. This is a company that has been significantly impacted by the pandemic and is currently in talks with some financial institutions about debt relief until the beginning of 2023.
It’s one we really wouldn’t be looking to take advantage of on the dip.
Pollard Banknote
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Pollard Banknote had quite possibly the most drastic fall of any small-cap Canadian company on the quarter, falling nearly 30% on its report of fourth-quarter earnings.
The company topped earnings expectations but missed revenue, EBITDA, and margin estimates. However, it wasn’t these results that caused the sharp drop. Guidance, rising costs, and a sharp drop in its operating income caused the stock to crater.
The company states that inflation will be a challenge, as the company has no ability to switch to an alternate, cheaper material to produce its product. It has stated that costs are expected to increase in 2022, and it cannot guarantee there won’t be further cost increases.
As we’ve witnessed throughout the quarter, the market hates uncertainty. Pollard’s forward outlook was about as uncertain as it gets, and although it expects strong growth in terms of revenue this is a company that has high-cost inputs. We’ve watched margins shrink year over year and from the sounds of it, it looks like they will continue to do so moving forward.
This is a company that underwent a significant rise in price in late 2021 and likely got a bit ahead of itself. However, valuations have come down extensively and the company is now trading in line with historical averages.
We’re certainly not rushing out to buy a company trading at historical averages that are expecting some big headwinds in 2022. But, we’re certainly keeping a closer eye on Pollard than we were in 2021, that’s for sure.
Bull List Stock
We’ve narrowed down a shortlist of Growth Bull List options and should have a new stock on the list soon.
The growth market is extremely volatile right now. But, there are certainly some attractive opportunities out there, and we’re currently sifting through them to find the best option.
Again, we always strongly encourage joining the Discord and directly communicating with Mat and I! Here is a Youtube video on how to get started
