It was a very successful week in terms of quarterly earnings when it comes to Bull List stocks.
In fact out of all the stocks to report this week, whether it be stocks on the Foundational, Dividend or Growth lists, only one disappointed.
That disappointment as you know is Real Matters. And, if you missed our e-mail earlier in the week we did end up removing it from the Bull List, however Mat and I are both hanging on to our shares.
We won’t speak about Real Matters below, just because we already did in the e-mail earlier in the week. If you missed it and want to view it, simply reply to this e-mail and ask.
So how did the other companies do? Lets take a brief look. Of note, if applicable, we will link the tickers to their updated reports so you can log in and view our full thoughts on the company during this quarter.
After the earnings recap, we’ll go over how to utilize a new ratio in our Key Data Screener (view here) to make better investment decisions.
Bull List Earnings
Equitable Bank (EQB) posted record results yet again, beating on both the top and bottom lines. The company raised guidance in the first quarter of 2021, and reported in this most recent quarter that it is already expecting to exceed the guidance issued. Of note, the company will also likely be undergoing a 2 for 1 stock split, which should help volume issues on Wealthsimple Trade. I (Dan) ended up adding to my Equitable position post-earnings.
Kirkland Lake (KL) posted outstanding results, a quarter that propelled the companies share price over 7% on the week. The company now expects to hit upper guidance in terms of production, and free cash flow came in 39% higher year over year. Currency differences are weighing heavily on the company right now, as it said the USD/CAD exchange is having a $70 USD impact on its all-in-sustaining-costs of $810 USD an ounce. Our thesis is well in tact on this one, we feel it is the best producer in the country, and is still undervalued at today’s levels.
Intact Financial (IFC) beat estimates by a wide margin, posted EPS of $3.59 when only $2.40 was expected, and posted revenue that beat by around $1B. Intact made a key acquisition of RSA on June 1st, and the company stated it is already having a high single digit impact to its net operating income. The stock didn’t move in terms of price as we expected, and in our opinion it still remains attractively valued, and is one of the best insurance companies in the country.
Foundational Stock Earnings
Fortis reported earnings that missed analyst estimates, however a large chunk of it can be attributed to currency fluctuations. This is not a company that is going to fluctuate much around earnings results, as with its regulated utility business model cash flows are very easy for analysts to predict, and as such it rarely surprises or misses in a big way.
Telus reported earnings that beat on both the top and bottom line by relatively small amounts. It’s simply steady as she goes for our favorite Canadian telecom company at Stocktrades Premium, and Telus is currently posting industry leading subscriber additions since the pandemic began.
TC Energy posted strong earnings as well, beating estimates in terms of earnings. Currency fluctuations and an overall weakening of the US dollar is impacting the company, but it states that although it has impacted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) due to economical hedges it hasn’t had any significant effect on net income. Overall, TC Energy remains our top foundational choice in regards to income paying pipelines.
Loblaws posted very strong earnings with revenue of $12.49B when $12.14B was expected, and earnings of $1.35 when $1.21 was expected. The company also increased the dividend by 9%, which should be music to dividend growth investors ears. Loblaws has had an exceptional 2021, returning over 36% since the start of the year.
An interesting note? This is higher than some fast paced growth industries, including all the US tech giants FAANG (Facebook, Apple, Amazon, Netflix, Google). Although very likely unsustainable, it’s impressive nonetheless.
Utilizing the Graham Number
Recently, we introduced a new tool (the Key Data Screener) for Premium members. It includes a bevy of additional information, one being the Graham Number.
While we have the description and formula posted on the site (click here and open up the “definitions and how to use this screener tab”), we thought it would be a good idea to give members a little bit more context behind this key data point.
For those unaware, Benjamin Graham is largely considered one of the all-time best investing gurus. He has been dubbed the “Father of Value Investing” and was Warren Buffet’s mentor. Graham believed that one should never pay more than intrinsic value for a company.
What is intrinsic value? That all depends on what approach you take to value a company. There are many different ways to determine intrinsic value but for our purposes today, that is the Graham Number.
Graham detailed his reasoning in the book “The Intelligent Investor” – a must read for all new investors. Quickly, Graham believed that a P/E of 15 and P/B of 1.5 represented fair value for stocks. Here is a snippet from the book:
“Current price should not be more than 1 1/2 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb, we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5.”
Again, the exact formula is posted on our website, but the Graham Number is in effect the fair value of a company reflected on a per share basis. This makes comparing the Graham Number to market value quite simple.
A company trading above its Graham Number is considered expensive and conversely, one trading below is considered good value. It is actually a very simple means of determining whether or not a stock is a good buy.
However, it is important to note that there are some flaws with the method Graham used. The most important and significant, is that it is based on historical data. In other words, it does not take growth into account.
This is the single biggest limitation with the Graham Number.
How to use the Graham Number
While others may have different perspectives, we like to use the Graham Number as validation of careful due diligence. We will certainly not buy a company just because it is below the Graham Number and will not avoid a company simply because it is above.
Context is everything. The Graham Number is usually not relevant for high-growth companies.
Why? Well for starters most aren’t profitable and as such won’t even have a Graham Number. If they are profitable, they are likely so to varying degrees.
I prefer to use the Graham Number with more established companies, which have a much more stable growth profile and have a consistent history of profitability. In fact, it is most useful when valuing businesses like banks, insurance companies, utilities and others who use the value of their assets to generate revenue.
One good example of this on our Bull List is Algonquin Power (TSX:AQN). Algonquin is a utility company that generates a good portion of its revenue and earnings from regulated assets. This results in stable and reliable income.
We’ve talked a few times about how AQN provides good value. It has one of the highest expected growth rates in the industry and is trading below historical averages.
Algonquin’s Graham Number confirms this undervaluation. Today, AQN is trading at a ~10.4% discount to its Graham Number of $21.96 per share.
Alternatively, one might use the Graham Number as a starting point for further due diligence. In my early investing years, when I was less sophisticated in my analysis, this is the approach I took.
It is one that served me (Mat) well and led to my initial investments TD Bank, Fortis, Apple, McDonald’s, etc. All of which ended up being core holdings in my portfolio.
