In this edition of Market Factors I discuss the ways I’ve been overrating U.S. stocks at the expense of domestic companies. I was surprised by the degree to which suburban condo prices are getting trashed and that is covered in section two. The diversion outlines a new discussion on linguistics that is more interesting than it sounds, and we look ahead to the important data releases for the next week.
A shopping cart is seen in an aisle of a Dollarama store in Montreal, Wednesday, June 7, 2023.Christinne Muschi/The Canadian Press
EquitiesU.S. companies bigger but not better
I might have been under-estimating the TSX if CIBC head of portfolio strategy Ian de Verteuil is right. My working assumption until now was to own Canadian banks and energy companies, some income-oriented sectors to get the favourable tax treatment, and then look to the U.S. for everything else. After all, the domestic market has little to nothing for health care, U.S. companies like Colgate-Palmolive offer the competitive moat of globally respected brands in the staples sector, and U.S. technology stocks dominate the sector in every way.
Mr. de Verteuil’s report earlier this week argues that up to half of the TSX is suitable as a “compounder”, a company capable of generating cash flow, profit and stock price growth consistently over the long term.
The strategist has previously recommended stocks from Canadian oligopolies like banks, rails, grocers and telecoms as buy and hold options that would create wealth over time.
With this report he added life insurers (while warning that he is struggling with valuations in the property and casualty insurance sector) and waste management and pipeline sectors. In the latter two instances his optimism is a bit tepid owing to profit margins (in terms of return on equity) relative to the oligopolies.
Mr. de Verteuil also looked to identify individual stocks that could compound investment returns over time. He wrote that “Dollarama Inc. (DOL-T) and BRP Inc. (DOO-T) are wonderful cash generating entities, and Stella-Jones Inc. (SJ-T) and CCL Industries Inc. (CCL-B-T) have focused on narrow businesses to drive long-term returns.”
Dollarama’s performance has crushed Colgate-Palmolive’s returns over the past five so maybe I shouldn’t be so hasty to look south for staples exposure. Colgate-Palmolive Co.’s (CL-N) stock has appreciated by 4.2 per cent annually over the past five years compared with Dollarama’s 30.5 per cent mark in U.S. dollar terms, including dividends.
In terms of BRP – the maker of recreational vehicles – I have a bias against pure retail stocks because people are fickle and their spending patterns are unreliable. (This doesn’t extend to the essential items that Dollarama and grocery stores sell). I have missed many investment opportunities because of this belief but I’m keeping it anyway.
U.S. companies are often glossier. For me it seems intuitive that a mammoth company selling Colgate toothpaste, Ajax cleaners, Irish Spring soap, Murphy’s Oil Soap and Hill’s pet foods among many more brands would have a stock that easily outperformed puny (by comparison) Canadian retailers. But that is definitively not the case.
I need to rethink things a bit. Just because a U.S. company or its products are more familiar, in any sector including technology, doesn’t mean their stock is a better investment and I need to get that idea out of my head.
A sign for Halton Hills, at the corner of Trafalgar Road and Steeles Avenue in the south end of town, Wednesday, October 25, 2023.Nick Iwanyshyn/The Globe and Mail
Real estateOntario condo prices hammered
Many suburban Ontario condo markets are getting crushed, according to Moody’s, with the damage correlated with distance from the major downtown areas.
Moody’s Analytics’ analyst Brendan LaCerda found that the correction in condo markets is more severe in suburban Ontario than the rest of the country. Within that trend, the outlying areas southwest of Toronto are getting hit much harder than the northern suburbs.
Some of the numbers in the Moody’s report beggar belief. Halton Hills condo prices, for instance, are down more than 50 per cent from the 2022 peak. Milton, Brampton and Mississauga condo prices are down roughly 25 per cent and Oakville and Pickering condos are down just over 20 per cent.
Ontario might be hit hardest on average but there are select B.C. markets that have also endured a beating. White Rock condos are lower by more than 40 per cent and West Vancouver condos are down more than 30 per cent on average, according to Moody’s.
DiversionsNew theories on how language changes over time
The rise of TikTok has increased interest in linguistics in some quarters. Pundits like Bloomberg’s Joe Wiesenthal are re-reading Walter Ong’s Orality and Literacy (a book so old I studied it at school and remember it as fascinatingly brilliant) for clues as to whether we are returning to an oral and visual, as opposed to text-based, society.
A recent study from McGill University has added interest in the specialty by challenging conventional wisdom as to how language changes over time. PhD student Gaurav Kamath used AI to study changes in the use of 100 different words in almost eight million U.S. recorded political speeches.
Mr. Kamath found that changes in language are inter-generational when previously it was believed that older generations had to die off before language changed. I’m not sure how important this finding is but I can report that linguistics is a far more interesting topic than many believe at first glance, with implications for culture, communication and even neurology.
The essentials
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Globe Investor highlights
Jamie McGeever looks at how the markets’ tariff resilience is challenging long-standing economic orthodoxy. Meanwhile, here he reports on the dramatic moves in U.S. assets over the last few days and how they serve as a microcosm of some deeper market divergences going on
David Rosenberg isn’t at all buying Donald Trump’s reasoning for firing labour statistics boss Erika McEntarfer and has some harsh words for the U.S. president
Ian McGugan ponders the question, what if all the AI excitement driving the markets eats the tech giants from within? On that note, investing professor Dr. George Athanassakos says history suggests you’re better off sticking with true value stocks than today’s high-fliers.
An analyst turned theology student used his professional stock-picking abilities to build a $1.1-million TFSA
What’s up next
Not much of note on the domestic economic report calendar for the next week. Thursday is the only day of real interest with net change in employment for July (10,000 new jobs expected) and the unemployment rate (7.0 per cent).
The profit reporting schedule is busier, starting with Thursday when BCE Inc. (C$0.703 expected), Brookfield Corp. (US$0.908), Sun Life Financial (C$1.77), Canadian Natural Resources (C$0.681) and Pembina Pipeline Corp. (C$0.643) all announce results. Emera Inc. (C$0.645) reports Friday. Next Wednesday sees Hydro One Ltd. (C$0.503) and Metro Inc. (C$1.533) report results.
The U.S. economic calendar is surprisingly light with only July CPI (0.2 per cent month over month and 2.8 per cent year over year) of wider interest on Tuesday. Earnings results for the next week include Constellation Energy Corp. (US$1.842) and Datadog Inc. (US$0.419) on Thursday and Cisco Systems Inc. (US$0.979 per share).
See our full earnings and economic calendar here