Results for May
**Written by Daniel Kent**
**Daniel Kent and Mathieu Litalien are long LSPD. Daniel Kent is long TD,BNS,BMO,RY. Mathieu is long TD,BMO **
After an excellent April, one that saw our Bull list gain nearly 27% over the course of the month, May was a little slower.
Our Bull list returned 3.12% over the course of May, just shy of the TSX Index returns of 3.28%. Overall throughout 2020, our Bull list is right on par with the TSX, posting a loss of 10.49% compared to a loss of 10.53% on the TSX.
Considering our Bull list is made up primarily of growth stocks, stocks that tend to under perform in bear markets, to be on par with the index right now is an extremely positive result.
Since inception however, we’re outperforming significantly. While the TSX sits at a small loss of 0.49%, our Bull list has returned just shy of 17% to members.
May was a very strong month for technology stocks. Bull list stocks Lightspeed POS (TSX:LSPD) and Constellation Software (TSX:CSU) outperformed the index at a substantial pace, posting returns of 28.90% and 14.65% respectively.
Lightspeed’s gains came on the back of very solid fourth quarter earnings. Earnings that were stated by the company a month prior would exceed expectations, but for some reason the market didn’t react. We saw this as an opportunity and highlighted Lightspeed to premium members a week prior to the 37% single day increase.
Constellation Software continues to impress, and is actually one of the better performing Bull list stocks of 2020.
Our May Bull list addition Polaris Infrastructure (TSX:PIF) is off to a nice start on the back of strong earnings.
The company expects free cash flow per share that could reach $2.45 CAD next year. If this is the case, Polaris is trading at only 5 times expected free cash flows. This is cheap by all means.
We had our eye on Polaris for practically the duration of 2020, and the market crash brought an excellent opportunity for investors.
Second crash?
As the markets keep rising, investors are confused.
Why are we seeing a sharp rise in the markets when the economy is still effectively shut down? It is an extremely hard, even impossible question to answer accurately. And we emphasize the word accurately.
A lot of pundits attempt to answer the question and place predictions on where the market will head. But, there is a huge difference between a prediction and a definitive answer.
Do the markets deserve to be where they are? Maybe not. But did the TSX deserve to lose nearly 40% of its value in under a month, the quickest decline in history? Probably not either.
The markets over the last two months have seemed to swing from complete panic to slight optimism. As an investor, it’s constantly on our mind. So how do we take it off of our mind and focus on more important things?
The answer is pretty simple. Just buy strong companies with solid fundamentals, and continue to buy them regardless of economic or market conditions.
Arguably one of the best investors of all time, Benjamin Graham, said in arguably the best investment book of all time, The Intelligent Investor, that defensive investors should be able to answer any market related question with “I don’t know and I don’t care.”
So the next time someone asks you if a second crash is coming, would you be comfortable enough with your current holdings to say “I don’t know and I don’t care”?
Now, if you’re a growth investor like myself (Dan), there needs to be some active management in a portfolio. If we’re looking to achieve higher than average returns, it will come with a much higher than average workload. That’s exactly why we look to take the vast majority of it off your hands with Stocktrades Premium.
But, there is still a very healthy portion of my portfolio that I can definitely answer with “I don’t know and I don’t care.”
Canadian Bank Earnings
**Written By Mathieu Litalien**
As discussed in our last newsletter, last week was an important one as Canada’s Big Banks reported earnings. Not only did the Big Six report, but smaller regional players such as Canadian Western Bank and Laurentian Bank also reported earnings.
These earnings are important as they are economic bellwethers. The banks give a glimpse into the overall health of the economy.
Overall, the banks delivered mixed results. Given their size and predictable earnings, the banks usually deliver earnings and revenue either inline, or within a few percentage points of estimates.
Not this time around. The banks either beat or missed by a significant margin – here is a recap:
**Percentages beside earnings per share (EPS) and revenue are increases/decreases year over year**
Canadian Imperial Bank of Commerce (TSX:CM):
- EPS of $0.94 (-68.0%) misses by $0.77 – Revenue of $4.58B (+0.9%) misses by $270M
Bank of Montreal (TSX:BMO):
- EPS of $1.04 (-54.7%) misses by $0.08 – Revenue of $5.46B (-3.4%) misses by $350M
Bank of Nova Scotia (TSX:BNS):
- EPS of $1.04 (-38.8%) beat by $0.09 – Revenue of $7.96B (+2.1%) beats by $90M
National Bank of Canada (TSX:NA)
- EPS of $1.01 (-33.11%) beats by $0.10 – Revenue of $2.04B (+15.3%) beat by $110M
Royal Bank of Canada (TSX:RY):
- EPS of $1.03 (-55.00%) beat by $0.54 – Revenue of $10.33B (-10.2%) misses by $1.01B
Toronto-Dominion Bank (TSX:TD)
- EPS of $0.85 (-54.7%) misses by $0.04 – Revenue of $10.53B (+2.9%) beats by $710M
The impacts of the pandemic shutdowns are proving to be difficult to grasp. This is not all that surprising given that what we are experiencing is unprecedented.
The two notable standouts were the Bank of Nova Scotia and National Bank. Both beat on the top and bottom lines and both managed to grow revenue YOY. National Bank’s 15.3% top line growth was particularly impressive.
On the flip side, analysts seemed to underestimate the impacts on the Royal Bank of Canada and CIBC. They missed significantly on earnings. Likewise, Royal Bank says the top line (revenue) shrank by 10.2% – by far the worst among all banks. Not sure anyone saw that coming.
Rise in provisions
The biggest concern for banks going into earnings was the rise in provision for credit losses. These are forward looking and essentially reflect the % of loans the banks expect will go bad. They are booked as a charge, and as such reduce net income. They didn’t disappoint with massive spikes, which is why earnings dropped considerably year over year. Keep in mind, if the loans don’t go bad, these can be added back to the company’s net income.
On the one hand, it represents a considerable hit to earnings over the short term. On the other, since they are forward looking a big spike usually represents the peak.
Overall, the markets reacted well as the banks are still well capitalized. This should enable them to maintain the dividend – at least in the short term.
All bets are off the longer the economy is impacted, and should a second wave hit us hard down the road.
On average, the banks rose by 8.38% to end the week, which far outpaced the 1.98% returns posted by the TSX Index. Leading the way was National Bank – not surprising considering strong growth.
Circling back to the regional banks – Canadian Western Bank delivered decent results and finished the week up 11.43%. For its part, Laurentian Bank made news for all the wrong reasons.
Laurentian had posted double-digit gains to start the week but suffered a 9.14% drop the day on Friday. This effectively wiped out all its gains and ended up being the worst performing bank.
Why the big drop?
Likely as a result of the 40.3% cut to the quarterly dividend. With the cut, Laurentian becomes the first Canadian Bank to cut the dividend in over 25 years. The last bank to cut was National Bank back in the early 90’s.
Subscribers could have seen this coming. Laurentian has consistently been the worst ranked bank on our Dividend Screener. It was in the bottom half of all dividend paying stocks and this was pre-COVID 19. That means the dividend was already questionable going into the crisis.
All things considered, Laurentian’s cut was not all that surprising.
Overall, the banks delivered decent results. They weren’t dire, but they didn’t exactly instill confidence either. The banks remain cheap, but will likely remain depressed until the economy rebounds in a meaningful way.
