Midway through the year, I like to put out a comprehensive newsletter on the current status of the Canadian Foundational Stocks. Generally, I put out the Canadian list first, followed by the US list afterward.
Because the Foundational Stocks are the cornerstone of many Stocktrades Premium member portfolios, I like to provide a bit more of a comprehensive overview on these lists and keep members up to date.
There are 11 Foundational Stocks, so it would be impossible for me to cover all of them in a single newsletter. Instead, I will spread them out over the next couple of weeks.
I won’t spend too much time reviewing my portfolio moves last week, as there was only a single addition, which was just a routine dollar-cost-averaging purchase of Brookfield Corporation (TSE:BN).
Foundational Stock Mid-Year Review
It has been a fairly strong year for the Foundational Stocks overall. Although they’re underperforming the TSX by a marginal amount, I’m not overly concerned about this basket of stocks eventually regaining its dominance over the index.
Out of the 6 years we’ve released the Foundational Stocks, there has only been one year (last year) in which they haven’t outperformed the broader TSX.
The Foundationals this year seem to be a tale of two baskets. While the cyclical companies continue to struggle amidst a weakening economy, the defensive holdings continue to excel in a rocky market environment.
I’ll spend this week’s newsletter covering the stocks that have struggled thus far this year, and next week’s will be focused on the companies doing well.
What you’ll find interesting is that despite these being the worst-performing Canadian Foundational stocks on the year, 3 out of 5 of them are outperforming the S&P 500!
Let’s get started.
Brookfield Corporation (TSE:BN)
Looking at Brookfield’s YTD chart doesn’t do the company justice. Turn this into a 1-year chart, and we will see returns in excess of 45% as the company has gone on an exceptional run.
Because the company is so diversified, it touches a lot of areas of the market. Some are doing well, while others are struggling.
The company’s real estate segment has been a double-edged sword in recent times. While its core portfolio is doing quite well, its commercial segments, primarily office real estate, have no doubt struggled.
In addition to this, both its infrastructure and renewable segments (BIP.UN and BEP.UN) have underperformed the broader market. However, the core aspects of the business are still performing quite well, with fee-related earnings and distributable earnings growing at a double-digit pace.
I’ve attached a chart of the company’s fee-related earnings to give you an idea of how well Brookfield is performing despite a slumping share price in 2025.
A company like Brookfield relies extensively on capital deployment and making deals. The higher the geopolitical uncertainty, the more reluctant corporations are to deploy capital and make investments. With the constant threat of tariffs and spats from political world leaders, businesses might not exactly be rushing out to invest in new infrastructure, projects, etc.
This is likely why we have witnessed some pressure on Brookfield’s price as of late. However, over the long term I have little concern. This is one of the best asset managers on the planet. If the stock traded at lower price levels for multiple years, I would utilize that as an opportunity to simply acquire more shares at discounted prices.
Waste Connections (TSE:WCN)
After a large runup in price over the last 3 years or so, Waste Connections is currently going through a bit of consolidation.
Likely the result of a runup in valuation over the last few years. The company thrived during the 2022 bear market and had some outstanding operational results in 2024 as well. However, at 40x free cash flow, a double-digit premium to its historical averages, I’m not surprised to see the company take a bit of a step back.
Waste disposal companies can thrive in practically any operating environment, which is likely why the company has been a 3-year outperformer of both the S&P 500 and the TSX Index. Fears of a recession have lingered for years now, and when those fears are present, lots will look to defensive companies that will likely grow earnings and free cash flow in spite of a recession.
The company’s exposure to waste disposal on the cyclical side of things (think energy and infrastructure) is relatively low. Residential recycling and waste, however, will remain steady no matter what the economy does. Despite whatever situation you’re currently going through, you’re still putting your garbage out on your regularly scheduled day.
And despite slowing volumes from the overall slowdown in the economy, the company has been able to more than offset this with pricing increases, pricing increases that will ultimately be a tailwind when volumes pick back up. I’ve attached a chart below to give you an idea on how effectively the company has been able to increase prices.
For most retail investors, a long-term mentality when it comes to your holdings is the path to success. We can ignore short-term market volatility and instead focus on accumulating high-quality businesses. The tempting situation of trying to sell Waste Connections when valuations got high and buy back in when they get low is one that will often lead to underperformance in the long term.
The company is expected to post double-digit earnings and free cash flow growth for the foreseeable future, and I do view this as a great opportunity to add this blue-chip defensive play.
Canadian Natural Resources (TSE:CNQ)
Energy companies have certainly been testing investors’ patience over the last few years. However, once we understand that these energy companies are going to be directly tied to the price of oil and, to a certain extent, natural gas, it becomes easy to understand why stock prices are down.
If we look to the chart above, you’ll notice one thing: the direct correlation between a multi-year slide in the price of WTI Crude Oil and a multi-year slide in Canadian Natural’s share price.
This makes these energy producers difficult long-term holds. Oil is bound to be volatile price-wise, and if, during every oil drawdown, we lose all of the pricing gains we’ve witnessed during the runups, it certainly frustrates investors.
However, I am still quite bullish on Canadian Natural over the long term, and its free cash flow policy is a bullish sign for investors who want to reap the benefits from a low-cost producer that aims to direct the vast majority of its profits back to you, the shareholder.
Recent acquisitions have caused its free cash flow policy to reduce down to 60% of FCF returned to investors. However, this is only the situation if net debt exceeds $12B. Once it gets below this, which I am fairly confident the company will be able to do in relatively short order, it will return to a 100% free cash flow return to shareholder policy.
The company can fund its operating costs, plus pay its dividends with WTI being in the low $40 range. This is one of the lowest-cost producers on the planet, and even though we’ve witnessed a multi-year slide in the price of oil, WTI is still $25~ above its breakeven point, leaving a lot of wiggle room for the company to continue to push strong free cash flows, reduce debt, and deliver value to shareholders.
It’s been a tough few years for energy producers and investors who hold energy stocks. However, I believe we are at somewhat of a cyclical bottom here, and Canadian Natural should benefit from an improvement in the economy over the coming years.
Granite REIT (TSE:GRT.UN)
Granite is a puzzling one. The REIT is doing just about everything right – growing funds from operations, improving payout ratios, and raising the dividend. However, the market has shifted to being increasingly bearish on industrial REITs. Although I don’t expect them to do well in this environment, I’m certainly surprised at how bad Granite has done, sitting on effectively flat returns over a 3-year timeframe.
Post-pandemic, the demand for industrial-style warehouses has gone down. We have to remember, during the lockdown-ridden economy in 2020/2021, the amount of warehousing needed for corporations skyrocketed. Now, in the midst of a large drawdown in overall consumer spending, demand is somewhat faltering.
Granite is a company that routinely maintained 97%+ occupancy rates during the midst of the pandemic. We’re now starting to see that fall a bit, with occupancy now in the 94% range. Its properties have also somewhat stalled out, now sitting at 144, just 1 higher than this point last year.
The company also has the added headwind of 27%~ of its revenue being exposed to an automobile company, that being Magna International. This has not been an issue thus far, and I cannot imagine a situation in which Magna is ever not able to cover its leases, but the current problems regarding automobile companies and tariffs could structurally change the way Magna operates, including the modification of its supply chains.
However, hidden behind all these issues is a REIT that is performing well from an operational standpoint, especially considering the current geopolitical and economic circumstances.
Funds from operations continue to grow at a double-digit pace (see chart below), the company’s payout ratio in terms of the distribution is best in class, and overall, it is in a strong position to weather whatever sort of situation comes at them.
Its guidance wasn’t the best, trending to low single-digit FFO growth over the next few years, but overall, I’m not worried about this one whatsoever. I’m willing to be patient until positive investor sentiment returns to REITs in general, as I view Granite as an industry leader and one that should be at the front of the pack when things turn around.
Alimentation Couche-Tard (TSE:ATD)
Alimentation Couche-Tard is a prime example of past stock pricing driving future expectations in terms of investors holding it. This is a cyclical stock that went on a monumental run during the pandemic due to sky-high consumer spending and rock-bottom interest rates.
Now that rates are higher and the company is going through a bit of a cyclical downturn, many investors are turning on the company, likely because they purchased it without realizing how cyclical the company can be.
When consumer spending scales back, fewer people travel. When fewer people travel, fewer people also visit convenience stores. Although Couche-Tard is primarily a fuel distributor, a lot of its higher-margin sales are made in food and product sales inside of the stores.
I’ve attached a chart below of the company’s same-store sales to give you an idea of the cyclicality. Look to the pandemic years, in which the company grew same stores sales at a mid-single-digit pace when discretionary spending was high.
The definition of a “convenience” store is one that consumers find… convenient. Products often come at higher costs, but ultimately, the convenience is most effective with consumers in a specific environment, and that environment is when discretionary spending is high.
Someone having a party might find the local Circle K which is a 2-minute walk from their home a convenient location to go and buy chips, pop, etc. However, when spending is tight, maybe they hop in their vehicle and make that 10-15 minute drive to their local grocery store to save $5-$10.
The more cyclical a company, the more we really need to be focused on the long term. It is highly unlikely consumers keep this tight of a grasp on their wallets permanently, and eventually, discretionary spending on things like food items, vacations, and overall travel will increase. And in this type of situation, a company like Couche-Tard should benefit.
At only 15.5x expected earnings, this is the cheapest the company has been, dating back to early 2023. If you were accumulating shares back then and bullish, you’re getting almost the same price to do so today.
However, I think where the difficulty lies here is a lot of investors bought this company solely on previous price action in terms of the stock price, and now the multi-year slide, to the point where the company has become attractive yet again, is dictating their decisions to not add any more.
I still view Couche-Tard as one of the best-operated companies in the country, one that has had some multi-year headwinds weighing on overall operational results. However, I don’t feel those impacts will be permanent.
Overall, these companies have “struggled”, but returns are still very reasonable
You know the markets have been good to us over the years when I’m doing a year-to-date review on the poorest performing Foundational Stocks, and there are only 2 that have even posted negative returns this year, and 3 of them are outperforming the S&P 500.
Keep focused on the long term. The ebbs and flows high-quality companies tend to go through will level out. If you look to any of these weaker performers, you will notice something: exceptional long-term results.
However, you will also notice another thing: practically every one of them has gone through a period of flat to declining returns, and investors who continued to accumulate shares and maintain confidence in their investment theses were rewarded.
Next week, we talk about the best-performing Canadian Foundational Stocks, of which there are many!
