On Tuesday, the S&P 500 was up 0.35% and Toronto was up 0.6% to a record high.
The record high on Toronto is welcome, but it is not necessarily cause for any great celebration, and the achievement of a record high certainly is not a recent to conclude that the market is over-valued. The Toronto stock index is made up of a weighted average of 249 companies. In most years the great majority of these companies make positive earnings. And they retain some (I believe roughly half on average) of those earnings rather than paying all of the earnings out as dividends. This causes the aggregate book value of the index to rise steadily. With more and more assets and equity invested in the 249 companies each year, the aggregate earnings of the index tends to grow most years. If the P/E ratio remains constant then the price of the index rises. In reality the P/E ratio is constantly changing with interest rates and investor confidence. However, over time the rising earnings does push the index to a new record high repeatedly over the years. In some cases a record high could be set daily. In other cases such as a market crash that follows a market peak it could take many years to reach a new high. But the point is there is nothing special about a record high to suggest that the market is over-valued or to necessarily get very excited about. But, yes, it is a welcome development.
Alimentation Couche-Tard was up 6.7% today to $60.80 based on its strong Q4 earnings report. I have partially completed an update for this company but still need to read the annual MD&A. At $60.80, I believe it remains an attractive investment. Its trailing adjusted P/E ratio is 17.7. It’s probably set to grow adjusted earnings per share by at least 10% in the next year and possibly more like 15 to 20%. Its current quarter (Q1 fiscal 2019) which ends at the end of July will show a sharp increase in revenue and probably earnings based on a very large acquisition it made at the end of June last year. The following two quarters after that will also benefit from smaller acquisitions that will affect those quarters but which were not yet made in Q2 and Q3 of fiscal 2018. However, offsetting that the fuel margin in Q2 2018 was unusually high and should be expected to be lower in Q2 2019. By Q4 of fiscal 2019 growth may be slower relying on same-store sales growth and continued added synergies from relatively recent acquisitions. But the company may make further acquisitions by then. Overall, I am tempted to add to my position at this price. It would have been better to have bravely added even more at the recent lower prices but now there is added confidence of earnings growth given the strong Q4 report.
Constellation Software was up 2.1%.
Housing Starts:
BNN television was reporting today that Canadian housing starts had surged to an an annualized level of 248,000. That sounded extremely high to me. Checking CMHC, they report the headline figure as 222,000 based on a six month moving average but they also indicated that the annualized June figure was indeed 248,000. When you consider that U.S. housing starts are running at 1,350,000 (and this after years of trending up from the financial crisis lows of I believe under 500,000 around 2008) and considering that the U.S. population is roughly ten times larger, it is evident that Canada is (and has been for years) building houses at a rate that is proportionally far higher than in the U.S. Yet, I heard Phil Soper of Royal Lepage say today that there is a shortage of new housing units in Canada!.
The 222,000 and the 248,000 figure were both pushed up by unusually high multi-family starts including notably in Toronto.
These housing starts figures certainly present a mixed picture. Single family starts were actually down 16% in Canada (down 19% in Alberta and down 24% in Ontario) while multi family starts surged 35% (including up 65%! in Ontario but down 12% in Alberta). These figures are probably too volatile to conclude much from one month.
Year to date, single family starts are down 10% in Canada (down 6% in Alberta and down 16% in Ontario) Multi-family starts are up 11% for Canada (down 5% in Alberta and up 19% in Ontario).