Canada's Stock Market: Apathy Means Opportunity

In this podcast, Motley Fool host Dylan Lewis and Motley Fool Canada analyst Jim Gillies discuss:

• How the TSX is stacking up to the S&P 500 so far in 2024.
• Why investor apathy in Canada is creating some low valuations and great buying opportunities.
• Two Canadian stocks to watch: MTY Food Group and Kits Eyecare .

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center . To get started investing, check out our quick-start guide to investing in stocks . A full transcript follows the video.

This video was recorded on July 01, 2024.

Dylan Lewis: We're celebrating Canada Day and checking in on America's neighbor to the north, Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool Canada analyst Jim Gillies. Jim. Thanks for joining me and happy Canada Day to you.

Jim Gillies: Thank you, Dylan. It's very much appreciated.

Dylan Lewis: I appreciate you putting in a few hours of work today on a federal holiday up at home. All right, let's dig into Canada. Jim, to kick us off, painting a picture of the state of the Canadian market. Year to date, I'm going to ask you to fill in the blank here. So far in 2024, investors in Canada are feeling blank.

Jim Gillies: Somewhat apathetic, probably.

Dylan Lewis: Somewhat apathetic. Can you expand on that?

Jim Gillies: Sure. Well, the Canadian markets not exactly set anything on fire. It's up about 4.5%. If you do a total return basis, I believe it's up just over 6%. That compares somewhat poorly against the S&P 500, which is up about 14.5% for the first half of the year. Although I do note that dividends added nearly two full percentage points, about 1.7 percentage points to total return for the TSX, but for the S&P, it was about 0.6 percentage points we understand why, because if you want to play a little thought exercise, compare to the Canadian market against an equal weight S&P 500, and Canada is actually beating equal weight S&P 500 total return. I think Canada is up about 6%, like I said, I think equal weights about just over 5%. That really tells you the story of the American market has been obviously the magnificent six. Yes, there's only six, there's not seven. Because on average, the magnificent six, which are all of the very top end of the S&P 500, those are up an average of 46.5% this year.

Dylan Lewis: And I'll note for our listeners, that the magnificent six you're referring to excludes Tesla. That is the one if you're doing the math at home that is not included in that basket Jim.

Jim Gillies: I was declining to say which company it was, but you are correct. Tesla is down 20% year to date, we at least before today it was, but I have other reasons for excluding it. So, it's I think Americans probably feel better about their market. Look at me, Canadian speaking for Canslaining for Americans. But I suspect Americans probably feel better about their indexes in their market because it has gone up strong, but it's been very narrow focus. Whereas in Canada, it's very apathetic, even though, it's up 4, 4.5%, it's up 6% year to date with total returns. So, like, Double that, assume it just kind of trundles along. Like, it's going to clock in a year, 10, 12% total return, which is not actually that bad. The Canadian total return index, the Canadian composite TSX total return is only about We always hear the stock market goes up 10, 11, 12% a year. That's the American market. The Canadian markets been about an 8% gainer for the past few decades. So we're on pace for actually a very good year, Canada-wise. But as I look around at the market, I look at what our companies are doing. The market feels apathetic.

Dylan Lewis: So you noted the outperformance for the S&P 500 there. The flip side of that is it's highly concentrated returns. There's a very small portion of the companies that are driving those returns, and that comes with its own risk, and I think that concentration has some people a little worried in the overall health of the market. Are any of those dynamics at play when we look at the TSX?

Jim Gillies: No, they pretty much rang out all semblance of optimism, to be honest with you. I spent some time buzzing around this morning. I provided you the numbers, but obviously, the listeners haven't heard them yet. So, like, I just pulled up 10 or 12 names, like, long track records of value creation, companies like Quebeco, Rogers Communications , Cogego , Magna , which is a big auto supplier. You don't have to look too hard to find Canadian companies trading well below that substantial discount on an earnings multiple basis, trading with substantial discounts to their 10-year relative valuation. I think I gave you 10 or 12 names, and I think the average discount to the last decade's earnings multiple was in the 30 percentage points. It's big. That's before we talk about REITs. There is a ton of REITs, Real Estate Investment Trusts that are all trading with 7, 8, 9% yields run by good people who understand the idea of REITs, where of course, they have to pay out a lot of stuff. Much of their cash flow, their funds from operations. They have to raise capital, they use a lot of debt or some of them use a lot of debt. Few of them might surprise you how little debt they're using, looking at U Smart centers. But still massive yields. Like, it's not hard to build a portfolio right now of seven-plus percent dividend yield players trading at to press a few of them have even got insiders and CEOs buying the units on the open market that's before we talk about the Canadian banks, which I know I've talked on about here before, five of the six of which are also cross-listed in the US. So you can invest in five of the Canadian big six, the only one that's not cross-listed is National Bank of Canada .

It wouldn't shock me that That is cross-listed in the future. National Bank, they are the sixth-largest bank in Canada. They're buying the eighth-largest bank. Once that deal is done, wouldn't shock me if they at some point, seek a US listing as well. But like the Canadian banks, so these are like your classic widows and orphan stocks. They are They are dominant. Like if you look at the 10 largest companies by market cap in Canada, three of them are the banks. If you do expand it to the 15, I think you get, you get five of the big six. Classic widows and orphans, they all had a track record of two-decade track record before COVID of raising their dividends like 9.5, almost 10% annually. Um, that's pretty good. During COVID, they were barred from raising dividends, I didn't know what's going on. Everyone's panicking. Want to make sure the capital the capital base of the banks is settled. Turns out, they did really, really well. The government then slapped a special banks-only extra tax thing because, government taxes.

But what's been interesting to me is since they've been allowed to raise their dividends again, which came at the end of 2021, the average of the Big Six, their dividends today cumulatively is 34% more than it was when they were blocked from raising their dividends. They've caught up with that 10 plus percent or that 10% annual CAGR I was talking about where they raised their dividends. Valuations across the board, today, three years ago, the average PE was about 12, 12.5. Average price to book was about 1.8, average yield was 3.7%. Today, the PE has gone from 12.5 to 10.5. The price to book has gone from 1.8 to 1.4. Average dividend yield has gone from 3.7-5.2, even as that dividend is up by about a third or more on average since they were allowed to start it again also, too, the big banks are putting a lot of I don't know if you've heard recently, the Canadian housing market has gotten overly enthused with itself.

Dylan Lewis: I was planning on asking you about that.

Jim Gillies: Yeah, that's the source of a lot of this stuff. But so they've been taking giant loan loss provisions I guess my takeaway from all of this is, look, this is going to end at some point I wrote a column last week, I think, where I also talked about, given the mays in the Canadian markets. It's not hard to find multiples, 10, 12 times earnings across really high-quality companies paying good dividends. Canadians don't seem to care. It feels. I actually wrote, I said that it feels like dividend investing is kind of broken right now. Like everyone just points at interest rate hikes and goes, Oh, well, I get 5% in a government bond. Why would I want 5% in a dividend yield? It's like this isn't this will not always be the case.

Dylan Lewis: It's interesting to hear you say that with dividends because that has been such a newfound focus of the markets here in the United States. We have so many tech companies initiating dividends, going back to the titans of the 80s and 90s, who returned capital in a variety of ways, including dividends. They were showed by the tech industry for such a long time over the last 15 years.

Jim Gillies: Well, I mean, the tech industry, they make so much cash. I mean, you can't spend at all on buybacks to offset dilution that doesn't help the common shareholder. It's nice to see, I mean, Apple 's paid one for a while. Google, of course, sorry Alphabet . Started one. Microsoft has done one for a while. But they're still not doing a large payout. I'm someone that likes a dividend or too I think paying a regular dividend is a really good indication of a management team that does understands discipline a little bit, frankly I understand the problems with dividends. They are double taxed in theory because they're tax paid after-tax dollars from the corporation, then they're taxed in your hands, assuming you don't have them tax sheltered. But I find it odd again, this is supposed be a celebration. This is Canada Day.

Dylan Lewis: We don't need to be all down here.

Jim Gillies: Well, I'm not down actually, where I'm taking this from, or what I'm taking this toward rather, is it won't always be this way one of the ways that you can get above average market returns over the long term, market-beating returns if you will, is you fish where other people aren't when they're not fishing there. Everyone loves NVIDIA right now. Cool, wonderful. Everyone's excited, 78 thousand articles a day are counting through my feet on NVIDIA. You and I are going to add absolutely zero value to any concept of whatever's going on with NVIDIA . NVIDIA is very, very richly valued right now history has not treated companies that have reached similar rich valuations, has not treated them well over time. Se Cisco and Intel from the tech bubble, and you can throw in Qualcomm and probably Microsoft as well for the first 15 years, and you come back and talk to me. That's what I'm saying is fish where other people aren't fishing right now, and right now, people aren't fishing in Canada like I said, there's all of these companies trading at substantial discounts to their 10-year average multiple. The Canadian banks are trading really well, very cheaply, and they have this history of dividend hikes and, classic widows and orphans, the REITs sector looks bombed out in Canada, and yet there's some really high-quality companies in there that are just going for a song. But the only Canadian company I would tell people to stay away from is, the fifth largest company in Canada is called Enbridge , and I think that one's a disaster. But other than that, I mean, everything's fine.

Dylan Lewis: So you started us out. You filled in the blank, they're saying apathy. But what I'm hearing from you is opportunity when it comes to the Canadian market.

Jim Gillies: I think so. Yeah. I'm obviously a regular investor in Canadian companies and a regular recommender of Canadian companies. It's frustrating, as public foolish stock pickers, there's nothing more frustrating, frankly, than you find a company that you're really excited about, and, it's generating lots of cash. It's it's management or smart and using that cash and the services shareholders. It's trading it a reasonable valuation, and you get really excited to put it in front of members, and then it lies there like a dead fish even as they continue adding cash flow and investing it for your benefit, and you want to get a stick and poke them and go like, What are you doing? Like, Come on, move, do something look, I understand. We gives us more of a time to get in and be happy with it. But, it can be a little frustrating sometimes.

Dylan Lewis: It's an exercise in patience. All investing is, and sometimes it takes a while for the market to realize what you're seeing. I do want to ask in that zone or in that vein of opportunity. You named several companies, including one you'd stay away from. But I'm curious, is there a company that hasn't come up yet that you would say, especially if you're not someone who's paying attention to the Canadian markets very much, this is one that you should be putting on your radar.

Jim Gillies: You want to go very staid and just very easy, or do you want to go kind of a little crazy?

Dylan Lewis: I'm going to say yes. Give me one of those Jim.

Jim Gillies: Okay, then, on the stayed and interesting it's trading at a really sharp discount, I think to history. It's trading where it was seven years ago before it's made a bunch of acquisitions. It's a company that grows through acquisition. It's a company I've talked about on this show before. It's only traded in Canada, Sorry Fools, so you'll have to find yourself a pink sheet. But the company's called MTY Food Group . Ticker is oddly enough MTY. It is trading about $45 right now or Friday, markets are closed in Canada today. Which is about six or seven times ABDA. The thing about MTY Food Group is they are a franchisor of restaurant concepts, and they've got about 90 banners in North America. They back in the day, I've owned them for over a decade, but back in the day they really mall food courts. You'd go into a mall food court, and there's 20 different restaurants. You didn't realize ten of them were owned by MTY Food Group, but they're all franchises. So they're all high-margin franchises, royalty revenues. Give me 6% of your sales off the top, plus another 3% for the advertising fee, and you can have all the operational risk, and you can have the capital risk, right? And traditionally, because of the high margins asset-light nature of that company, I was willing to pay up about 12 times ABDA up about 2006, 2007, it was rare it got below 12 times ABDA frankly today, it's about 6.5, I think.

Dylan Lewis: There you go.

Jim Gillies: It's lower than it was in 2017 just, for names, the next time you go to a Cold Stone Creamery, to A Papa Murphy's, to Olympe subs, to Baja Fresh, and like I said, there's 90 banners there's a famous Dave's barbecue, you are supporting MTY Food groups. So that's a pretty stayed, easy one.

Dylan Lewis: [inaudible] growth here Jim.

Jim Gillies: I'll say if you want to go some a little sillier, which, no promises how it'll do, but I think it's interesting. Yeah, let's go pure Growth just for fun. It's a company, and again, it's only a Canadian listing, so you either have to have a brokerage that allows you to trade on Canadian exchanges. Aside, Canadians don't know how good we got it. Every Canadian broker allows you to trade on US exchanges, just as seamlessly as the TSX. Every single one. But I know you guys. Interactive Brokers , I think, and I believe there's a pink sheet for this one as well on OTC, but a company called Kits eyewear. It's interesting. It's small. It's basically glasses online. They can do tests where they try to make the whole process cheaper and easier and doing it largely online. You get your prescription, you upload it. You pupil I distances, I guess something else you have to measure. The ones I'm these are just simple readers. I buy these three for $20 at Costco, Who cares if they break? But, my significant others, she wears prescription glasses, both my parents wear prescription glasses, hey, those ain't cheap and Kits eyewear is doing a lot to to make it easier. Their growth numbers have been really great. It's easier and cheaper to buy online. Their growth numbers have been great. The guy in charge, the founder CEO. He started another business, grew it for years. It was in the online contact contact Lenses business. He started that years ago, sold it for a Mint. He's basically running his playbook back again this time with online. So I think we recommended it in Gems, $3.50 Canadian. It's currently 850 I think I'm going to paraphrase what I wrote when I recommended it about a year or so ago. But paraphrased this guy's going to it to grow up to $20, $25, and sell it again.

Dylan Lewis: So there you go. There's opportunity.

Jim Gillies: There you go.

Dylan Lewis: Jim, appreciate you joining us on your day off and ringing me in Canadian with us. Hope you have a good Canada Day I hope you have a good Fooliversary. 19 years the Fool. Thank you for all your time. Here.

Jim Gillies: Thank you.

Dylan Lewis: Many of those days spent here on the podcast. Thank you so much.

Jim Gillies: No problem. Cheers.

Dylan Lewis: Listeners, that's going to do it for today's episode. Just a heads up. We are taking a break from our usual second segment for the holiday week. We'll have our news focus combos, Monday, Tuesday, and Wednesday. We'll be off Thursday and be back Friday with our usual radio show. As always, people on the program, My own Stocks mentioned and the Motley Fool may have formal recommendations for or against. [inaudible] based solely on what you here. I'm Dylan Lewis. Thanks for listening. Happy Canada Day. We'll be back tomorrow.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Dylan Lewis has positions in Shopify. Jim Gillies has positions in Apple, Bank Of Nova Scotia, Costco Wholesale, Kits Eyecare, MTY Food Group, National Bank Of Canada, and Shopify. The Motley Fool has positions in and recommends Alphabet, Apple, Cisco Systems, Costco Wholesale, Enbridge, Kits Eyecare, MTY Food Group, Microsoft, Nvidia, Qualcomm, Shopify, and Tesla. The Motley Fool recommends Bank Of Nova Scotia, Cogeco Communications, Intel, Interactive Brokers Group, and Magna International and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .