Another week passes, and it looks like another all-time high for most indexes. Considering the amount of geopolitical tensions and tariff commentary going on, it’s surprising to say the least. It just goes to show how impossible it is to predict these things.
I prefer simply staying invested, earning average to above-average returns over longer periods of time and reaping the rewards. Because, as Buffett always said:
Your portfolio is like a bar of soap. The more you mess around with it, the smaller it gets.
It’s easy to try to chase returns in an environment like this. Meme stocks have most certainly made a resurgence. However, don’t deviate from your long-term goals in order to chase outsized returns with speculative bets. As quickly as the gains come, so too will the losses if you get caught in them at the wrong time.
In this week’s newsletter, I’m going to be taking some dives into Stocktrades Premium highlighted companies and their earnings, one of which I am debating pulling the trigger on and buying after a bit of a slide in price.
Let’s get right into it.
Waste Connections (TSE:WCN)
This is the company I am debating pulling the trigger on after a double-digit pullback from April’s levels. I haven’t yet, but it is likely I will look to initiate a position when I start purchasing stocks again in August.
It was a great quarter from Waste Connections. Both earnings and revenue topped expectations.
However, the company is on a bit of a slide here, price-wise, since April of this year. I can’t really put my finger on what it is, but I imagine the markets going risk-on and posting outstanding returns since the initial tariff threats are certainly playing a part. After all, in a way, this is a defensive company. One that just so happens to put up outstanding growth.
Revenue and EBITDA were both up 7%~ on the year, and overall margins continue to increase, primarily due to the company’s pricing power. The one area the company is struggling in, however, is its commodity segment. Recycled commodities fell by 15% and overall renewable energy credits also fell by 15%. The company’s energy and production waste segment in the United States reported a double-digit decline.
This is the one segment of the business that is going to be cyclical relative to the price of commodities and the economy in general. For the most part, its commercial and residential waste disposal will continue to turn out solid growth regardless of the economic conditions. However, the energy sector is definitely one that will see movements.
I’ve attached a chart below to show you how strong the company’s residential and commercial waste disposal segments are growing. I apologize for the close colors, Fiscal.ai would not let me change them.
In terms of pricing growth, they were able to grow core pricing by 6.6%, well exceeding their overall cost inflation to provide the services.
On the flip side, a slowing construction industry is hitting volumes, falling by 2.6% on the year.
I’ve mentioned this a few times before, but if the company can keep up with the core pricing growth in the mid-single digits, it should be able to tread water from an overall results standpoint, as it will offset their cost of production and the decline in overall volumes.
Eventually, activity will pick back up, and when it does, core pricing growth will continue to pay dividends down the line, as not only will prices be up, but activity will be up as well.
The company made numerous acquisitions on the quarter that should contribute about $200M~ to their annual revenue. The company stated it is finding it hard to find acquisitions with similar margin profiles (Waste Connections EBITDA margins are 33%~, most of its acquisitions are 25%-30%~).
However, these are still rock-solid margins for the industry, and if it can continue to make small tuck-in acquisitions like this, the company will be able to continue to provide outsized growth.
The company commented on its guidance, guidance it has continually raised over the last 3-4 quarters. It said this quarter it will be maintaining guidance. However, they had mentioned they are maintaining it simply due to the current macro-environment. Had that not existed, its results were strong enough it would have raised guidance yet again this quarter.
The company repurchased just over $235M in shares year to date, and has produced just shy of $700M in free cash flow on the year.
Overall, as volumes recover, especially in landfills, margins should continue to accelerate. As a result, we should see Waste Connections continue to grow at a high single-digit/low double-digit pace annually, making it one of the best defensive holdings on the TSX.
Loblaw (TSE:L)
Loblaw topped expectations on both the top and bottom line again. As soon as you think momentum might be drying up for this company, it just puts up outstanding results. The company has been one of the best-performing defensive retailers outside of Dollarama in the country over the last half-decade.
Revenue continues to grow in the mid-single digits, but capital expenditures invested back into the business, combined with extensive share buybacks, are causing earnings growth to outpace revenue at 11.6% year-over-year. Free cash flow came in at $640M, which is $165M higher year-over-year. The company took $445M of that free cash flow and bought back shares on the quarter.
Same-store sales increased by 3.5%, and for the first time in a while, it was the food segment, not the drug segment, that fueled higher growth. Food same-store sales came in at 5.8%, while pharmacy came in at 4.1%. You’ll notice in the chart above that Food same store sales came in at 3.5%. This is just an adjusted figure the company used, while I looked at non-adjusted figures.
The company mentions that the overall inflation on its food products that it is seeing internally is below the 3.3%~ CPI average for countrywide food inflation. This should allow it to keep prices lower and continue to drive more discount-focused customers into the store.
The company mentioned it plans to roll out 80 new stores on the year, and one interesting element here is that they mentioned small-format stores in urban areas are their best-performing segment, not the large outlet stores it has. This is likely an element of overhead and scale. The smaller stores can offer better pricing structures.
You’ll notice in the image above the company’s store counts went down. This was simply due to the sale of some of its international stores, Wellwise.
One thing that has continually surprised me is the company’s ability to continue to grow ecommerce sales. They jumped 17.5% on the quarter, and digital ordering of groceries, something I thought would largely cool coming out of the pandemic, is no doubt here to stay.
On the tariff front, management stated tariffs are still impacting about 1/3 of vendor cost increases. The company continues to label items that have had tariff impacts with a “T,” and management stated sales of tariff-flagged items are declining by over 15% in some weeks. The “buy Canadian” element is clearly in full force.
Overall, the quarter was a strong one, and Loblaw continues to put up exceptional results because of its discount presence in Canada. Canadians are pinching pennies, and Loblaw has a multitude of stores where they can achieve this.
On a final note, the company announced a 4-for-1 split.
Alphabet (GOOG)
Alphabet continues to really impress me. The company is one of the cheapest Magnificent 7 stocks, primarily based on a lot of fears that its search engine will be replaced by artificial intelligence and LLMs. However, there is no sign of this happening. In fact, there are more signs pointing to the fact that Alphabet is going to be at the forefront of AI, rather than being disrupted by it.
Overall sales grew by 12% and earnings per share by 33%. The company’s operating margins came in at 30.7% compared to 29.3% last year.
When we look to traditional Google Search, ad revenues grew by 12%.
However, YouTube is the shining star at this point in time as more and more consumers are turning to video content versus the traditional written content.
YouTube Ads increased by 18% year-over-year, one of the larger increases I’ve witnessed from the segment in quite some time. The company stated that AI-driven ad tools are sending more advertisers to the platform.
Why is this? Traditionally, Google Search ads have been a lot easier. It is a text link with a description below it.
YouTube, on the other hand, requires video, scripts, production equipment, etc. It is definitely the more cumbersome, more expensive way to advertise when it comes to creating the ads. The easier this is, the more advertisers will try out the platform and the more Alphabet will benefit.
Cloud revenue grew by 25% year-over-year, and the company mentioned that AI is the driving force in this.
Gemini, Google’s LLM, is now integrated across Search, Gmail, Docs, and Ads. The company also mentioned that the number of Google Workspace customers using the Gemini add-on is “growing rapidly.”
I am a firm believer that Alphabet is relatively cheap here, and it seems like management believes this is true as well. The company repurchased nearly $20B in shares on the quarter. In terms of capital expenditures, the company stated it will still exceed its targets of $48B in 2025, with the vast majority of that going toward artificial intelligence buildouts.
This will no doubt have a short-term impact on free cash flow. However, once these investments start to generate profits themselves, they should turn out to be extremely beneficial to investors.
At this point in time, I think Alphabet is an outstanding add. If you look to the chart below, the company is trading at 20.6x earnings. Typically, this is a company that has traded in the 28x~ range. This marks a 26% discount to historical averages.
Pessimism is high when it comes to the company’s core business model (Google Search) being disrupted by AI. However, I do believe Alphabet is finding ways around this (its AI Overviews in search) and will continue to be a dominant force, especially when it figures out how to monetize it at higher rates of return.
