Newsletter December 1, 2016

InvestorsFriend Newsletter December 1, 2016

Growth Companies versus Growth Industries

I often hear companies explain, with great excitement, that they are in a very large industry or an industry that is growing rapidly. This leaves me unimpressed.

Being in a growth industry is neither a sufficient condition nor a required condition for being a growth company or, more importantly, a company that will provide high returns.

Of the companies that I follow, those with the largest compounded annual growth in their stock prices are not in high growth industries. These include:

Stantec Inc. – Its share price has grown 2,760% since I started monitoring it on September 3, 1999. That is a compounded annual growth rate of 21.5% for 17.3 years. Stantec provides engineering consulting services on an hourly fee-for-service basis. This industry segment has not grown any faster than the general economy. Stantec’s growth was achieved by relentlessly expanding its geographic reach through continuous acquisitions.

Canadian National Railway Company – Up 1018% since I started “tracking” it on August 27, 1999. That’s a compounded annual gain of 15.0% for 17.3 years in addition to its dividend. Rail traffic grows with the economy but it would not be considered a high growth industry. CN acquired most of its U.S. operations just prior to my start date. It has grown partly through some additional acquisitions. It has also bought back its own shares aggressively which added to growth. Earnings per share grew faster than revenues per share due to increased efficiency.

Alimentation Couche-Tard – Up 990% since I first looked at it on March 5, 2005. That’s a compounded gain of 22.7% for the past 11.7 years. Couche-Tard operates convenience stores, most of which include gasolines sales. This is not a fast-growing industry. Like Stantec, Couche-Tard grew by geographic expansion and a relentless and ambitious acquisition strategy.

Dollarama Inc. – Up 370% in the 4.9 years since I first looked at it on January 15, 2012. That’s a compounded annual gain of 37.1% per year. Discount retail is not a growth industry. Dollarama grew strictly organically by relentlessly adding new stores.

Constellation Software – Up 1123% in the 5.8 years since February 5, 2011. That’s a compounded annual gain of an astounding 53.9% per year. The type of software that Constellation provides has not been a high growth industry in those years. Constellation grew mostly by acquisition.

It turns out that of the companies on my list that have the highest share price growth, none are in particularly fast growing industries. All, however, are extremely well managed companies.

The Money Changers

My perception is that the fees that Canadian brokers charge for exchanging U.S. and Canadian currency are outrageously high. For registered accounts, customers are basically captive to their brokers who take advantage of this by charging high exchange fees.

I don’t complain when a bank branch charges an exchange fee of several percentage points to exchange paper money. In that case the bank has to keep an inventory of paper U.S. dollars and has staff and facility costs to cover. However, the bank-owned brokers are charging high fees even in cases where customers enter the transaction electronically and where larger sums are involved and where the broker is likely facing very little risk or costs of any kind. There are competitors willing to exchange currency electronically for fees that are tiny by comparison. The difficulty is that money in registered accounts can not be removed from the account and is captive to whatever fees the broker wishes to charge.

My two most recent experiences with exchanging currency ilustrate the problem and what I learned about possible solutions.

Last week, in an RESP account at TD Direct, I converted $2500 U.S. dollars that were in a U.S. dollar money market fund to Canadian dollars. The fee that I was charged on the conversion was 2.14% or $53.50 U.S. which was about $72 Canadian.  This was a hidden fee. My money was exchanged at a rate of $1.323 or 75.59 U.S. cents per Canadian dollar. However, TD Direct confirmed to me that the wholesale rate at time was $1.3444 (74.38 U.S. cents per Canadian dollar) for a difference of 2.14 or 214 basis points.

When I complained about the high fee, the TD Direct staff were sympathetic. They explained that I would have gotten a somewhat lower exchange fee by phoning in and having them do the exchange for me. That’s odd since it would have increased their cost.

Also, last week, I moved $14,945 U.S. cash from the U.S. dollar sub-account of my RRSP to the Canadian dollar sub-account or “side” of my RRSP. I did this using “Norbert’s Gambit” by buying the currency Exchange Traded Fund DLR.u which is effectively U.S. dollars on Toronto and then having this “journaled over” to the Canadian side of my RRSP and selling it as DLR. This resulted in $20,117 Canadian dollars. That was a good exchange rate equating to one Canadian dollar per 74.29 U.S. cents. I believe this was within a basis point or two of the wholesale exchange rate. I did incur fees of $53 from TD direct which amounts to 26 basis points. Had I just entered a currency transfer I believe the fee would have been about 2.14% or $431. Using Norbert’s Gambit saved me about $398 in this case. I believe I also could have faced added costs based on the bid/ask spread or the risk of a sudden move in the currency so keep that in mind if trying this method.

TD Direct inserted some confusion by sort of warning me that the trade would take 3 days to settle. But meanwhile I was still able to immediately buy stocks with the Canadian cash and so the 3 day settlement period did not seem to affect me at all.

The Post-Jobs Economy

There is a lot of fear lately about job losses due to automation. Experts tend to respond to this fear by comparing the fearful to the (misguided)  “luddites” who tried to stop the industrial revolution by smashing the new machines in textile mills in England in the early 1800’s. But I wonder if maybe the luddites are right this time. Also, we are hearing a lot about “the gig” economy where many young people hop between contracted “gigs” and can’t find a “permanent” job. The concept of the “gig economy” got me thinking about the extent to which our existing economy is mainly a “jobs economy” and whether that is destined to change and what some of the implications of such a change might be. See my article about the Post-Jobs Economy.

Toronto Stock Index Valuation

I updated my article that calculates the valuation of the Toronto Stock Index under different growth scenarios. Unfortunately, with the low current earnings on the TSX (due to lower energy prices), it is now more difficult to estimate the valuation of the TSX. In part, this is because the TSX index is not a diversified index.


Shawn Allen, InvestorsFriend Inc.