Losers of the TSX, year to date

Rank ordering year-to-date, losers on the TSX, with a minimum market cap of $50 million:

What strikes out at me?

Canfor Pulp (CFX) – What a miserable industry pulp and paper has been over the past four years. Their profitability last decade has been quite good, and then 2019 hit and that was it. Now they are closing down core assets in British Columbia (their Prince George mill is a considerable producer). Most of their production is destined for export to Asia and the USA, and if there is ever a poster child for how BC is a high-cost jurisdiction to conduct forestry, this one is it. CFP owns 55% of CFX. Contrast this with Cascades (TSX: CAS) which the common stock continues its usual range-bound meandering (remember – they were one of the prime recipients of demand for toilet paper during the onset of Covid-19!). If there is any sense of regression to the mean on CFX, however, it would be a multi-bagger stock. The question would be – when? Solvency is not too particular a concern – they’ve got their lines of credit extended out sufficiently.

Verde Agritech (NPK) – A foreign fertilizer firm, notably one of their board members got cleared out of half of his position in the company on April 24th on a margin call. I have no other comments on this other than my professed non-knowledge about Potash and the fertilizer industry. I note that Nutrien (NTR) has been trending down for over a year.

Corus Entertainment (CJR.b) – They cut their dividend, and are realizing that their degree of financial leverage is really going to hurt their cash generation, especially in an industry that is becoming more and more questionable for advertising revenues (broadcast television). The risk here is obvious.

VerticalScope (FORA) – How they managed to get over a half-billion valuation when they went public is beyond me. Rode the 2021 “web 3.0” bubble for the maximum (right there with Farmer’s Edge and the like). Given the organic business is marginally profitable and unscalable at best, and given their existing debt-load, good luck!

Vintage Wine (VWE) – This is a US/Nasdaq entity, I don’t know why this went on the TSX screen, but I checked it out anyway. Sales issues (declining), cost containment, and a large amount of debt plague this company. However, if you shop around any of their wineries, they do offer a “Platinum Shareholder Passport“, where if you own 1000 shares (which is now US$1.08/share, not too steep), you qualify for “25% discount on any wine purchase made at Vintage wineries and web stores.”, which quite possibly might be even larger than a $1,080 investment, depending on how much wine you end up buying. Now that’s a non-taxable dividend you can drink to!

Autocanada (ACQ) – How the mighty have fallen. After blowing a considerable amount of capital on share buybacks (the latest substantial issuer bid at $28 – stock is now $16) in 2022, they are finally feeling the pinch of margin erosion, especially from their last quarterly report. There are macroeconomic headwinds in place here, in addition to a not inconsiderable amount of debt. On their balance sheet, they did something smart by financing a $350 million senior unsecured note financing in early 2022 at 5.75% at a 7-year maturity, but there is still $1.2 billion in other floating rate debt on the books, which needless to say is getting very expensive. Even worse yet is the impact when you have to pass these costs onto your customers in financing charges, so suddenly your Land Rover that was a low $799 per two week payment is now $999! At some point, customers walk away and then decide they want a Toyota Corolla, which is also inconveniently unavailable everywhere. See: Gibson’s Paradox.

… a bunch of Oil and Gas drilling companies are on the list. No comment – it is pretty obvious why.

Brookfield (BN) – A surprising name to see on the list. I have a “no investment in entities named Brookfield” policy simply because of complexity. There are so many interrelationships between the various Brookfield entities that I do not want to make it my full-time life to keep appraised with it all.

51 on the list was Aritzia (ATZ) – I have long since given up on predicting women’s retail fashion trends. I note that Lululemon (LULU) is still sky-high in valuation (forward P/E of roughly 30). Victoria’s Secret (VSCO) is trading at a projected P/E of 5. Aritzia has kept a relatively decent balance sheet (only material liabilities is the retail leases they have committed to) and the projected multiple is 20. If you can get into the minds of the clientele, you would probably get more visibility on the future sales of this company. How do institutions do it? Should I go stick out like a sore thumb and go outlet mall shopping?

Anything else strike out at you?

Buying and selling retail fashion stocks

I’ve been reviewing a bunch of miscellaneous stocks today (both new and things that I’ve researched well into the past) and I will just write a bunch of short thoughts, on a topic that I don’t give much attention to, and that is fashion.

The last time I wrote about Vancouver, BC-operated Lululemon (Nasdaq: LULU) was about five years ago. I was mentioning how a $9 billion market capitalization is mind-puzzling. I’ve checked today and they’re up to $17 billion. Lest an investor think that this increase in capitalization was due to equity issuances and dilution, an investor over the past 5 years would have doubled their money. All of the price appreciation, however, was in the last year. No positions, never had any, but always curious as to the drivers that make these fashion stocks tick.

I also remember writing about Coach, and Kate Spade. Clearly I don’t frequent these two stores enough since I just checked and Coach bought out KATE for $18.50/share and changed its name to Tapestry (NYSE: TPR). I remember Coach was running into the issue of too much expansion and their main handbag products were simply not reaching that level of exclusivity that once made it a special brand. KATE investors did not do well as their brand appeal fell off faster and Coach was probably trying to consolidate that “mid-to-upper” segment.

Finally, two more Canadian companies. Roots (TSX: ROOT) has continued to dither since its initial public offering. Financially they’re still trying to figure out how to ramp up their profitability (they are modestly profitable on a yearly basis, although when it isn’t Christmas, they bleed cash).

Canada Goose (TSX: GOOS) continues to “wow” me and reminds me of Lululemon in the old days – something trading with a P/E of a bazillion. Their FAANG-styled valuation, however, is well deserved – looking at their last three fiscal years, revenues have ramped up nearly at 50% growth and gross profits have also increased percentage-wise – so more revenues, and at a higher rate of gross profit. If you can extrapolate that for the next 10 years, they’ll be able to pay of Canada’s national debt with the amount of corporate income taxes they will be paying. The question becomes a matter of whether they can pivot when suddenly seeing everybody dressed up in warm parkas with the circle patch no longer becomes fashionable.

I remember Guess? (NYSE: GES) was on my value radar screen when doing some research in this area last year. Their stock was around US$10/share at the time and I was mighty surprised to open up the quote screen and see it at US$22/share today. I have no idea whether they are fashionable again or not. You don’t see it in their financial statements, however – they’re basically a break-even operation. But Guess has always been unusual compared to some other fashion companies in that their balance sheet is debt-light and cash-heavy, which gives them a lot of time to figure out how to turn their $2+ billion in revenues into $2+ billion in profitable revenues.

Likewise, looking at Abercrombie & Fitch (NYSE: ANF), they seem to be in a similar position as Guess – the revenue drain has stopped, but profit levels are still relatively low.

In the latter two, small changes in profitability percentages will have substantial impacts on the bottom line, which gives their equity inherent leverage to a change in market environment. It’s pretty clear the market is betting on this happening to some degree.

A company that has been cited by various value Canadian investors everywhere but still receives not a lot of respect from the market is Reitmans (TSX: RET / RET.A) – people cite their strong balance sheet (it is indeed, about $150 million cash and no debt) but the entity is marginally profitable and it isn’t entirely clear how they can increase profitability. This probably is an issue facing most fashion retailers without brain-share in the consumer space. Commodity retailing, to put it mildly, it is a horrible area to be in.

Quiet times

Sometimes doing nothing is the best policy and the last two weeks have been exactly that. There’s been a small amount of portfolio adjustments, but nothing too serious. If I have something more exciting to report, I would have. There isn’t anything. Credit spreads are tiny and investors are generally not being very adequately compensated for risk.

In a “would have, should have” world, Lululemon (Nasdaq: LULU) would have been a short in my portfolio a year ago, but that opportunity has now passed. Coach (NYSE: COH) is also on that short list. Both of these are subjected to confirmation bias by females that I know are into these sorts of things. Both of them are trading at valuations which can (now) be considered reasonable (LULU still being a tad expensive, but not as ridiculous as they were before), but both brand names are clearly on the downtrend. In fashion, trends are everything. Apparently Kate Spade (Nasdaq: KATE) is the next up-and-comer and while traditional valuation metrics say this one is very expensive, perhaps talk to some teenagers that have disposable income and your opinion may change.

No positions, just curious. It makes outlet shopping somewhat more tolerable when looking at these various brands from a purely financial perspective.

Lululemon valuation

I notice that John Hempton of Bronte Capital is scratching his head with Lululemon’s (Nasdaq: LULU) valuation.

I’ve been scratching my head since they had a $2.8 billion market cap, and now they are trading at $9.2 billion.

They are headquartered in Vancouver, British Columbia, Canada, which is right in my backyard.

The after-tax profit margin (19%, trailing 12 months) is just incredible for a clothing company. It is right up there with handbag producer Coach (NYSE: COH), although in the latter’s case they have a somewhat more reasonable valuation.

In both cases, understanding women’s sense of fashion is the key investing variable. What’s the next meme after yoga pants?

Lululemon again

Lululemon (Nasdaq: LULU) is up to US$61/share, nearly at its all-time high upon announcing that it made more money in the fourth quarter than analysts expected.

I have written about LULU before and am continually amazed at their ability to “surprise” in such a fashion. The most valuable asset such companies have is their branding, and LULU has been able to strike the sweet spot in women’s fashions for quite some time – although there is competition encroaching, they have still been able to keep surprisingly ahead.

At a market cap of 8.8 billion, it makes you wonder how much higher they can go – looking at what that capital can purchase, instinctively I would not want to put a single penny of that into Lulu given existing valuations. That said, I thought the same thing when it was trading at $4 billion. Tells you know much I know about fashion trends.