This weeks newsletter will be primarily some updates we made to our Late Stage Growth portfolio, along with a Bull List stock that reports earnings a bit later than most companies.
But first, lets dive into the moves I made last week. Remember, my portfolio is fully viewable from the Premium dashboard, by going under the Premium menu option and selecting Dan’s Portfolio.
Dan Portfolio Moves
As I mentioned I would do previously, I sold my positions in Toronto Dominion Bank (TSE:TD) and Bank of Montreal (TSE:BMO) and took a 3% position in National Bank (TSE:NA). I didn’t deploy all of the capital into National, and I now have a 1.6%~ cash position I’m waiting to see what to buy with.
If you missed my commentary on why I did this, I’ll explain it again.
For practically my entire investing career, I have deployed a mean reversion strategy with the Canadian banks. This means I buy the worst performing Canadian bank, with the strategy that they will eventually revert back to their historical valuations, often leading to them being one of the better performing banks over the next year. This is also a strategy we utilized heavily on our Bull Lists at Premium.
This has been a strategy that has worked relatively consistently since the financial crisis. Since 2007, a mean reversion strategy with the banks has outperformed an equal weight strategy (utilizing Solactive’s mean reversion bank index versus their equal weight index) by about 1.8% annually.
To give you an idea of this in actual dollar amounts, $10,000 in the mean reversion index in 2007 would be $56,300 today, while an equal weight approach would be $42,606.
The difficulty is this strategy hasn’t worked out all that well since 2021. In addition to this, I’ve been attempting to reduce the overall positions in my portfolio and consolidate a bit, and this was arguably the easiest thing to do for that.
I now have a combination of Equitable Bank, Royal Bank, and National Bank, all relatively equal weight positions, for my banking exposure here in Canada.
BRP (TSE:DOO) Earnings
After a string of results that topped expectations on all fronts, BRP reported a relatively weak quarter. Revenue of $2.69B missed expectations of $2.79B, and earnings per share of $2.46 missed estimates of $2.61.
The company also changed its guidance to the downside, which we’ll get into shortly.
The headline numbers and guidance all pointed to the company having a rough day post-earnings. However, it seemed like operational struggles were already expected and priced into the stock, as it ended up closing the day at +6% and is up another 7% today.
This is a prime example of how difficult it is to judge where the market will take a stock over the short-term and how headline numbers, although useful, are just one small piece of the overall puzzle.
Despite a challenging macro environment, the company reported record sales in its Powersports segment, and it continues to capture market share despite being the dominant player in the industry. The market seemed to shrug off the weak results, primarily because it was driven by unfavorable weather conditions this winter. It was one of the warmest on record, which will no doubt impact the company’s sales.
When we look to the final quarter of 2024, the company reported a 10% decline in overall retail sales. However, excluding snowmobiles, which soft winter conditions would have hit the hardest, sales fell by just 2%. When we look to the full year, total retail sales grew by 8%. If we exclude snowmobiles, they grew 12%. The fact that the company can still drive double-digit sales in this high-rate environment is a testament to its strong brand and current market share.
Guidance is arguably the most important aspect of the company right now, as it released its full-year Fiscal 2025 outlook. The company expects slower sales across all business segments, with the largest decline being in seasonable products. Total revenue is expected to be $9.1-$9.5B, and earnings per share of $7.25 to $8.25.
This would represent declines of 8.3% and 25%, respectively. The company expects the soft winter conditions to continue impacting earnings to kick off its Fiscal 2025.
They expect the lower winter product sales to impact earnings per share by $1.25. If we consider this as a bit of a one-off situation, the company may see a recovery of that $1.25 per share in Fiscal 2026, which is likely why the market wasn’t worried too much by the guidance.
We are still fans of BRP, an believe patient investors will be rewarded.
You can view our full report on BRP Inc here.
Late Stage Growth Model Portfolio Overview
The late-stage growth portfolio had another decent performance this past year. The portfolio generated positive returns of 9.33% and beat its benchmark by approximately 150 basis points.
While it did trail the S&P/TSX Index, we must consider that approximately 30% of the portfolio is in bonds, so it is not a direct comparison.
Through the first few months of 2024, it continues to outpace its benchmark, which is a combination of the TSX 60 and a bond index, despite a few stocks that have dragged down the portfolio. Speaking of which, let’s look at the good and bad of the portfolio.
The Bad
Two stocks stand out here, and in hindsight, having them both in our portfolio was likely not a good idea, given the intertwined risk. What stocks are we talking about? TELUS (T) and TELUS International (TIXT).
TELUS International disappointed investors last year after growth slowed to a crawl. This led to a pretty significant reset in guidance, which consequently led to a big reset in valuation and a drop in share price. In 2023, TIXT lost 57% of its value. It has since stabilized in the first few months of 2024.
Unfortunately, TELUS, as the majority shareholder, also took a hit on the news. This compounded issues for them as the telecom industry is under significant macro pressure due to high interest rates. Fiscal 2023 also saw TELUS accelerate some capital expenditures, but unfortunately, it all seemed to be ill-timed due to high interest rates.
While TELUS didn’t fare nearly as badly, it lost ~10% of its value last year. Subsequently, it has lost an additional ~10% to start the year as telecom pressures remain. The biggest issue here is high rates and they are staying higher for longer based on previous estimates. That said, once rates ease, so will these pressures, and TELUS will benefit.
High rates also impacted the performance of Emera and Fortis, both of which had disappointing years that trailed the markets.
The Good
There were a few strong performers in this portfolio that stood out. First, Shopify rebounded from a tough couple of years and returned 119% in 2023. It was one of the top stocks on the TSX Index and proved once again why it is one of the best Canadian tech stocks to own.
Shopify seems to be consolidating to start the year, and it eeked out a 3% gain. This is normal, considering the huge gains it amassed last year.
Another company that enjoyed a strong rebound in 2023 was Parkland Fuels. This is not a company that one would expect to deliver outsized returns, but it knocked it out of the park last year. Parkland’s stock closed the year with 44% gains, an awe-inspiring performance. The stock has cooled as of late, likely due to behind-the-scenes issues with its board and institutional investors. We’ll see how this all plays out, but there was no denying it had a strong year.
Dan ended up liquidating his Parkland position based on the management turmoil. However, we will hold it in this portfolio as it is a relatively small position compared to Dan’s position size. This mitigates the risk and the portfolio can still benefit if the situation resolves itself and Parkland continues to perform well.
Then, there was Dollarama, which delivered gains of approximately 20%. Considering the cost of living and skyrocketing prices in general, it is not surprising to see Canada’s top discount retailer benefit. As long as prices remain high and the consumer remains tight, shoppers seek the best deals and go out of their way to snag them. At this point, food prices are so high that it is probably worth the extra trip to stop at your local Dollarama.
Not surprisingly, their strong performance has continued this year, up 8% in the first few months of Fiscal 2024.
Changes to Portfolio
It’s not often we make big changes to this portfolio. Typically, changes involve trimming and topping up positions to rebalance in line with target allocations.
This time around, we will trim Shopify and the iShares Core S&P US Total Market ETF and top up our position in TELUS.
We are then going to make two bigger changes. Firstly, we are moving on from TIXT.
There are two reasons for this. First, TIXT may struggle in terms of growth over the next bit, and we think there is a better opportunity for the one we add. Secondly, we already have exposure to TIXT through TELUS which owns a majority stake. So, while we are moving on from the company, the portfolio will still be exposed to TIXT via Telus.
We saw how sensitive TELUS was to TIXT’s performance when it revised guidance downwards in early 2023. With that in mind, it is best to limit the risk of the portfolio and stick with TELUS. If TIXT finds its footing and returns to growth, then we will still indirectly benefit due to our exposure to TELUS.
In its place, we are going to add PayPal. While the company has struggled over the past year, it has started to regain its footing. Despite some current headwinds, Paypal is still putting up attractive growth numbers (mid-high to low double-digit). You can get our full thoughts on PayPal in our report, but we felt this was a good add in place of TIXT. Also worth noting, we will keep the exposure low for Paypal, likely in the 2% range.
Finally, we are going to swap our TD Bank (TD) position and add National Bank (NA) in its place. I don’t think any of you would be surprised by this move. We just felt that given the current macroeconomic environment, we felt more comfortable with National Bank’s strong history of performance.
It is also a move that Dan made in his personal portfolio last week.
Not only that, National Bank is expected to grow earnings in the mid-to-high single-digit range over the next two to three years. In comparison, TD is expected to post negative growth (-2.5%) this year before returning to mid-single-digit growth in Fiscal 2025.
Since this is one of our growth portfolios, it only makes sense to choose the bank that is expected to post higher growth rates, even though TD may be trading at a bigger discount.
We’ll be keeping the targeted exposure we had for TD (4-4.5%) range for National Bank.
Of note, all of the model portfolio data sheets have been updated as of April 1st.
