Expressions I don’t use anymore

Screaming buy
Undervalued
Overvalued
Priced for perfection...

These are some of the financial expressions I don’t use anymore or that I’ve never used. Why? Because they’re all easy formulas for something that’s not that easy to evaluate.

Let’s take two examples. Two great companies which operate in a duopoly industry and which are very predictable: Mohawk Industries in the carpet corner and Mastercard in the electronic payment corner.

Mohawk Industries (MHK): After a couple of disappointing quarters, MHK has fallen to it’s lowest price in 5 years. It’s currently selling for 10 times next year’s earnings which is exceptionally cheap  for that company. The average PE ratio has been around 18-20 for many many years even if it’s a cyclical company. But for the short term, I don’t see how things could improve that much. After all, many other construction-related stocks have been hurt a lot. But I trust historical datas and I’m sure MHK will be back to the 18-20 PE level in a few years. In other words, there’s no momentum there for the moment but it will be back like Rocky has been back stronger after his defeat. It’s probably gonna take the same time that it took between Rocky I and Rocky II.

Mastercard (MA): That one has been expensive for many years. But results have been great for years and it’s dominating position has improved steadily. It’s currently selling for 25 times next year’s earnings. But when you have a moat like Mastercard, when your ROE is that high (in the 80’s), when your growth is still spectacular (15-20% per year) and your debt level is low, how could you deserve a valuation of 15 times earnings?

So, these two are selling for a price they deserve. I think that Mohawk deserves a price slightly higher but that’s just my opinion.

Not any of these two deserve to be qualified of overvalued or undervalued or priced for perfection or whatever because when you compare them with other similar stocks (in a similar situation) they have similar valuations.

Busting the limits

If you're like me, your contributions to your TFSA and to your RRSP have been done many months ago. And all the money has been invested. So, now, you see the 9% decline of the S&P/TSX over the last month and you say to yourself: "Fuck, how come I've already invested all I could?".

Well, maybe it's time to bust your limits.

With your RRSP, you can invest 2000$ more than what you're allowed to without a penalty. It gives you a little flexibility in times like these.

And with both accounts (TFSA and RRSP), for every month you have put more money than what you're allowed to (excessing the 2000$ flexibility you have with the RRSP, in that particular case), you may have to pay a 1% penalty (may have to pay, because I think the governement won't bother you for a few dollars, but I may be wrong). For instance, if you've put 5500$ in your TSFA already and you decide to add 1000$ on november 1st, you may have to pay taxes on the 1000$ that's over what you're allowed to.

Precisely, you'll have to pay 1% for each month where you've busted your limit. So, in that case, you'd have to pay 20$ for 2 months of an excess of 1000$.

I don't know if the market will continue to drop and if it's the right moment to invest, but it's interesting to know that, by the end of the year, if we want to put some extra money in our registrered accounts, the penalty isn't that heavy.

Obviously, a market drop in the beginning of a year wouldn't be a good moment to apply that strategy.

Time to go for some companies with some debt?

There's some fear about high-debt stocks right now because of the rise of the interest rates. Marriott, Sherwin Williams, Lowes and Mohawk (all great companies, but that carry a medium-large debt) have suffered these last days. They've all lost at least 10% of their value recently. There's some other names too, like Canadian Pacific that released great results this week but that didn't rise that much, perhaps partly because of their debt.

I think we should never put a big part of our portfolio in stocks that carry a large debt. The ideal, is a debt-free stock, like Five Below or Richelieu Hardware. But ideal stocks dont always have momentum or an interesting price, so these two examples are not the best in the current situation. But, whatever happens with the reserve or with any other economical stuff, these debt-free companies operate without any worry in that regard. And they sell their stuff for which sales are totally predictable.

I think that the slight rise with the interest rate may be an occasion to look for a great company that carries a medium debt. A great management team that made it's proofs in the past will probably continue to do so with a slight increase of the rate. Obviously, chosing a Valeant type of stock wouldn't be a good idea because I didn't write "astronomical debt".

So, which stocks could be interesting? Those written above. A market drop is a much better moment to buy something than the specific drop of a stock. 

Don't hesitate to disagree with me. 

Interest rates in Canada

The market went worried about the rise of interest rate  Actually, it went mad last week.

I don't know what's so worrying about a little increase of the rate. Because all things need to tend to their mean eventually, and since 2009, we're not in the mean at all.

Take a look at the chart below. The average interest rate in Canada over the last 28 years has been  around 6% (5,89% to be precise), and right now we're at 1,5%.

Almost every time in the history, when things didn't reach their mean for a long time, something bad happened. If the rate stays too low for too long, it's obvious there's gonna be negative impacts. When the access to money is too easy, there's abuse. And people, as well as enterprises, may act in a restless way.

OK, if the rate gets a little higher, our mortgage's gonna be more expensive, such as our car loan. And some stocks will be affected because of the debt they carry. But it's gonna be gradual and I'm pretty sure that the canadian governement knows that a lot of people in Vancouver are gonna have problems to pay their crazy mortgage if the rate goes up too quickly.  

So, with a rate under 5,89%, I don't see why people should worry. Everybody should know that we might get to 5,89% sooner or later.

Personnally, I live my life expecting often the average level of everything. Everybody should do that: it helps to prevent bad surprises.

Social democracy

I’m currently in Norway. And I want to write a few words about social democracy.

Norway is a beautiful country. Landscapes are amazing. People are nice and look very healthy. They drive their cars with a civism you’re not used to in North America. Kids have usually very blonde hair and they’re cute. They look like everybody that never went to Norway think they look like.

Everybody admires Norway and it’s great social system. The education system is one of the best in the world, if not the best.

Even if everything looks incredible, there’s probably some unhappy people in Norway. Otherwise, Edvard Munch would have never painted « The Scream ».

As a canadian, in this trip, I’ve only been bothered by one thing. One small thing: the price of EVERYTHING.

For instance:

A litre of fuel: almost 3$.
Tolls on the road: some days, I paid 75$.
Parkings (where you must pay) everywhere, even in small cities of about 15 000 people.
Candies: twice the price we pay in Canada because there’s a tax on sugar here.

Some may say the government is right to tax everything that’s bad for the planet and for humans. But when you want to buy apples and bananas, you still pay twice the price we pay in Canada.

And still, you see more expensive cars on the road here than in Canada (Tesla, BMW, Audi, Volvo, Mercedes).

I’m not a specialist at all of the tax system in Norway, but depending on what you’re buying, the tax goes from 12% to 25%. And I don’t know what it looks like when it comes to a job’s pay but I’d bet they pay more taxes on the income than us.

That’s what comes with social democracy.

About credit cards

I'm one of those travel hackers. It's a special name for an ordinary hobby: I'm one of those people always looking for the best credit card out there to benefit from their bonus.

For instance, this summer, before I went to central america, I've ordered two new credit cards. One that gave me a 150$ bonus for free and another one that gave me a bonus of about 270$ for a fee of 39$ (plus some super great advantages).

Via www.ratehub.ca, you can compare all the credit cards in Canada. It's great because some of them have very interesting sign up bonuses. Before a big expense (like some plane tickets for instance), I order a new card that requires an expense of 1000 or 1500$ in the first three months to get a reward of 150, 200 or 300$. In other words, my expense is 20 or 30% lower because of the sign up bonus.

And some of them have super advantages, like free access to VIP lounges in airport (where you can eat endlessly or drink like a rock star for free), insurances about a delayed flight (500 or 1000$ if your flight has a delay of 4 hours or more), zero exchange rate when used in another country, and many many other advantages, depending on the card.

I probably manage to get 1000 or 1500$ of rewards each year with these credit cards. And I never use more than 3 or 4 credit cards at the same time (once I get the bonus, I destroy the card).

It's a way to increase you income by at least 1000$ a year. And it only requires 30 or 60 minutes of your time.  

Portfolio review (october 2018)

Less than three months to go before the end of the year. So far, 2018 has been a good year for me. I've came to the realization that a steady portfolio with stocks that retain their value and don't follow a roller-coaster pattern appeals to me. I'll probably stick to that approach until I die.

I mainly sell or buy stocks given what they bring to my portfolio. Recently, I've added Lassonde (LAS-A.TO) because it's PE ratio is relatively low, it's beta is very low. However, growth is not that incredible for the moment and the ROE is a little low. But it has potential. And anyway, a lot of things reside in the percentage of your portfolio devoted to a specific stock. For instance, if you tell me that me 50% of your portfolio is invested in Lassonde, I'd think your a big drinker of juice.

But if you've put only 2% of your money in Lassonde, I'd say that you perhaps concentrate on higher ROE and growth stocks and leave a small percentage of your portfolio to solid stocks in which you have just a little less faith.

Up until now, my portfolio's perfomance has been 8% this year (12% before last week's correction). It's still great because the TSX/S&P did about -2% since the beginning of the year.  So, I beat the market by 10%. I couldn't be ashamed by such a performance.

What about you?

Observation about human nature

One of the things that amazes me the most in life, is how many people change floor to take a crap at work.

I admit, I'm one of them.