It’s a relatively slow time on the markets. However, we did have a couple of stocks report earnings, and we are removing one stock from the Bull List.
First, let’s dig into my moves on the week. I’m going to go a bit more in-depth here, as there was some notable moves.
My portfolio moves
I made two buys on the week from weekly contributions into the portfolio, and one sell.
Of note, I did take a week off of buying Telus, but I will resume that next week. My plans are to get the company to the 3%~ range in terms of total allocation (now sitting at 2.77%). From there, I will reduce my position accordingly when (if) valuation multiples expand.
I added to Boyd Group Services (TSE:BYD)
My first add on the week was Boyd Group Services (TSE:BYD). The stock is proving to be more volatile than I’d imagined. However, I’ll welcome the volatility to the downside at this point as it allows me to accumulate more shares at discounted prices.
When we look to valuations for Boyd on a price-to-operating cash flow basis, if we isolate the pandemic crash out of the equation, this is the cheapest the company has been in over 13 years.
Below highlights Boyd’s price-to-operating cash flow ratio in orange, while the black is what it has typically traded at over the last 5 years, and the yellow is what it has traded at over the last 10 years.
I added to Berkshire Hathaway (TSE:BRK.B)
My second addition on the week was Berkshire Hathaway (BRK.B). The buy wasn’t for any particular reason other than simply the dollar cost-averaging strategy I deploy into most of my holdings.
Berkshire has had an outstanding year, up more than 27%. However, I’m still bullish on the company over the long term, and as a result, I have no issue with adding now.
I sold my A&W Royalty (TSE:AW.UN) position
A lot of members may be confused by this, so I figured I would dedicate a section of the newsletter to it.
A&W Royalty is set to merge with A&W Food Services and create a new corporate entity that is much like Restaurant Brands International (TSE:QSR). It will no longer be a royalty company, but a corporation where investors have exposure to the entirety of the business.
A&W has offered to pay investors $37 per share if they don’t want the shares of the new corporation. So, this is where the confusion lies. Why would I sell my shares at $35.20 when I can wait a few weeks and get $37 per share?
The simple explanation, and is also why A&W isn’t trading near $37 right now, is that the company has only allotted a particular amount of cash for share payouts in the deal. So, if all of the money is used up, one may be forced to get shares of the new corporation instead.
I do believe the newer corporation will eventually settle, at least initially, below $35~ a share. So for this reason, I’ve chosen to sell. I do believe a lot of investors will prioritize liquidity at this point and ask for the cash payout. They’ll then revisit the new corporation later on after they see a few quarters of results to see if they’d like to re-enter.
Could I be wrong on this and be giving up $1.80~ per share? It is possible. However, I do feel there is a very good chance I’ll be given a small amount of cash, and a larger chunk of shares in the new corporation. So for that reason, I’ve chosen to sell early.
We’ve removed Lightspeed (TSE:LSPD) from the Bull List
For those who were unaware, last week, Lightspeed went public that it was putting itself up for sale in an attempt to get purchased by a larger US competitor or possibly even a private equity firm.
The stock had an outstanding week as a result, up around 17.5%. However, I do feel this situation is sub-optimal from a variety of standpoints. Let’s dive into it.
My main worry here is that management has hit a standstill when it comes to trying to turn this into a profitable business and, as a result, is looking to sell it off to someone who can.
The timing of the talks about selling is odd for a company that relies a lot on small to medium-sized businesses. Small and medium-sized businesses are often the most susceptible to high interest rates and the economy overall.
If we believe we are at the beginning of a rate-cut cycle and possibly the bottom (or at least near the bottom) of an economic cycle, things should start to pick up for many businesses and consumers moving forward. This should ultimately benefit Lightspeed and will almost certainly benefit a purchaser if there is one.
The time to theoretically sell the business was in 2021 when small businesses were thriving, and market valuations were high. Instead, Lightspeed was buying up companies, and now, many investors are faced with the reality that this company could be sold off for cheap.
Nuvei went private not too long ago at a price tag of 4.5X EV/Sales. Lightspeed trades at around 1.7X EV/Sales at the time of writing. It is possible that an offer could come in around the 2.25-2.5X range. However, I don’t expect it to command close to the valuation of Nuvei, which was a profitable, cash-flowing company.
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The other reason for removal from the Bull List is I believe many members will think this to be an arbitrage opportunity, which it is, to an extent. Let me explain.
The stock is up 17.5% on news of the intention to sell. One could buy at this point and hope an offer in that 2.25-2.5x EV/Sales does come in. In this situation, you’d realize a hefty 30-40% premium from today’s price.
However, the difficulty comes from the fact that there is zero guarantee of a deal. I believe if a deal doesn’t come to fruition, the stock will not only lose that 17.5% it gained this week but also possibly more, considering the fact the company could not find a suitor.
If this type of arbitrage/speculative gamble is within your risk tolerance, by all means. But for the sake of the likely majority of members who would not risk losing 17.5%~ to earn 30%, it is best for me to remove the company from the Bull List.
As for my personal position, I will be holding the company but will not be adding more at this time.
Costco (COST)
Costco closed out Fiscal 2024 on a high note. Although the company’s revenue of $78B missed expectations by about $2B, the company’s earnings per share of $5.26 came in well ahead of estimates, likely offsetting the sales miss.
Many headlines will point to the fact that Costco only grew revenue by 1% on a year-over-year basis. However, it’s important to take into consideration that last year’s fourth quarter had an additional week of reporting. When we take this away and make it an apples-to-apples comparison, sales grew by 7.3%.
The company’s overall numbers still look rock solid. Same-store sales increased by 5.3% in the US, 5.5% in Canada, and 5.7% internationally. Although the average ticket price fell by 0.3%, 2.1%, and 2.2% in the same geographical locations, the company has been able to more than offset this by a more than 6.4% increase in overall foot traffic into their stores.
What exactly does this tell you? It tells you that consumers are scaling back on a lot of discretionary spending and focusing primarily on grocery products, leading to lower average ticket prices (the amount of money customers are spending per visit). However, the store’s popularity from a staples perspective means more and more consumers are getting Costco memberships and visiting the stores for essential items.
I am a big believer that the shift in consumer spending when it comes to food is permanent. For this reason, Costco should be able to realize additional tailwinds when interest rates fall and discretionary spending picks back up. It will maintain the volumes and customers who go to Costco for essential items but will also begin to benefit from discretionary spending increasing, which should amplify earnings even further.
The company’s gross margin came in at 11%, which is up 0.3% on a year-over-year basis. However, Costco’s real profits are made from memberships.
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Membership income came in 6.5% higher year-over-year, and the warehouse now has 76.2M members, up 7.3%. Its US/Canada renewal rates came in at just under 93%, while worldwide sits at 90.5%.
The company added 14 new warehouses to close out the year and now sits at 890. It expects to close out next year at 916.
Overall, it was a great quarter for the company, whose business flywheel continues to roll and appears impossible to stop. Valuations remain expensive. However, the company rarely surprises, which is something the market is certainly going to like.
BRP Inc (TSE:DOO)
BRP produced a mixed quarter. Revenue came in at $1.84B, missing expectations for $1.9B, and earnings per share of $0.61 came in well ahead of the $0.43 estimated.
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However, despite the large beat on earnings in the quarter, BRP is going through some struggles, not necessarily operationally, but on the consumer demand end of things. Year-over-year, revenue fell by 33%, and earnings per share fell by 81%.
Overall, the largest drawdowns in total sales come from the company’s more discretionary items, such as pontoons, personal watercraft, and three-wheelers. Their side-by-side and all-terrain vehicles declined by mid-single-digits on average.
This decline was relatively in line with industry averages. I believe these types of vehicles will be a bit more resilient to a poor economy because they’re also utilized outside of just recreational use. In contrast, something like a Seadoo is almost exclusively for recreational use.
I’m not going to speak much on the quarter because it was an ugly one from a demand perspective. What I’m going to speak on mostly is the company’s guidance. The company downgraded its guidance after results, which marks the third consecutive quarter it has done so.
To me, this is a clear sign that management doesn’t know how bad the economy will get and is, for the most part, guessing when it comes to results. I think it would be much better for the company to pull guidance until the situation becomes clearer. They are unlikely to do this, as it may spook some investors, but marking guidance down three straight quarters is no doubt spooking investors as well.
The company now expects to earn $7.8-$8B in sales over the next year, and earnings per share of $2.75-$3.25. This is a material reduction from the $6-7 in earnings per share it had predicted last quarter and is even more notable than the double-digit earnings it expected 3 quarters ago.
Overall, cyclical stocks will be cyclical. We have to learn to accept this and understand that the economic downturns allow us to accumulate shares at lower prices in industry leaders like BRP. I plan to do just that.
