Rob: I’ve stayed away from Valeant for a while. A lot of volatility lately, a lot of ups a lot of downs and this whole Walgreens Deal, honestly, the market doesn’t like the fact that Mr Pearson’s out.
Speaker 2: How risky is this company financially?
Rob: It’s too risky for me. There are too any unknowns and I want answers before myself and my clients are going to get into the stock.
Rob: Welcome to Straight Talk, I’m Rob Tetrault from the Tetrault Wealth Advisory Group. Today, we’re looking at risk and volatility. What the heck do they mean and how are they different?
Let’s start with risk, risk is the likelihood of your investment in a specific company going to zero or effectively you losing most or all of your money. Think of a mining company that’s in Northern Alberta, they’re down to their last few hundred thousand dollars or their last million and they’re drilling into the ground, they need to strike gold. If they don’t strike gold, that company is going belly-up. If they strike gold, great! Maybe they’ll go from eight cents to 12 cents or 24 cents but if they don’t they’re going bankrupt. We believe that’s a significant risk, that’s something we want to stay away from, you might as well go to the roulette table if you’re gonna do that. We believe that volatility is a natural occurrence based on world events and consumer behavior that not only is good for the markets, long term, but also presents a great opportunity.
Think of Brexit in 2016, overnight the Brits voted to exit the European Union. Volatility took over in the market, people started selling equities, stocks. In the morning the news hit and then more people sold. Next thing you know we got a thousand point negative day. Reality sets in, people realize these are the same companies with the same profits, same management. Nothing is fundamentally changed about these companies, so what happened? The prices came back, naturally, fairly quickly in fact and the people who sold made a decision based on emotion obviously lost out. We actually believe that volatility can be a very good thing for portfolio managers, such as myself, to take advantage of market inefficiencies and re-balance of a portfolio.
Take a look at what I said in February 2016 when the market had fallen almost 25 percent in North America.
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BNN Host: What is interesting to you right now in this crazy market environment Rob?
Rob: Well I’m really interested in oil, I really like financials. Somewhere near here in my mind there will be a bottom in the next… whatever it is, three, six, nine months. I do know that long term, I’ll be happy that I bought financials around this time.
Rob: Alright, here’s the straight talk on risk versus volatility. At the Tetrault Wealth Advisory Group we believe that, one, risk is a four letter word and it’s not one that we like. Two, risk does not mean the same thing as volatility and three volatility can present opportunity. Thanks for watching.
Rob: Welcome to Straight Talk, I’m Rob Tetrault from the Tetrault Wealth Advisory Group. People often ask me, how do you decide when to pull the trigger on the stocks and how you evaluate companies that trade on exchanges? Let’s take a look at that question and get you some answers right now.
First of all, how are stocks measured? Well they trade on exchange, if more people are buying than selling the price goes up. If more people are selling than buying, the price goes down. The price that you see on the six o’clock news is the price of the last trade of the day.
Stocks have historically over time, traded based on a multiple of revenue or earnings. That’s why earning always drives stock price. Historically, they’ll trade anywhere from five or six all the way up to 20 and sometimes even significantly more than that. Senior companies, the companies that has been in this country forever and have solid growth and always profitable, they trade generally at a lower multiple than companies that are growing. For example, if we compare the financial sector, banks, insurance companies in Canada they will historically trade at a lower multiple, somewhere in the 12 range than grow sector such as technology, health care, those will generally trade on significantly higher multiple. Why? Because there’s a perspective future in growth. They might grow significantly more than banks next year. The market is willing to pay for that potential growth and that’s why the multiples will be higher.
The key when you’re looking at all these different sectors and all these different multiples is you wanna make sure that these companies have a solid backbone. And what’s that solid backbone? Well for us, we wanna make sure there’s strong management. Well established record of being able to generate profit continuously, year after year. We also want a company that has access to capital. Now whether that’s to the capital markets or the financial markets, we want a company that’s able access capital, strong management and is able to continuously drive earnings forward. So if we have that, that’s a very good road map for the stock we wanna own. So at the end of the day, we want to own companies that are profitable and are growing their profits year in, year out. Now if that company is doing that, every year it’s growing by 10 or 15 percent their profit, long run, the stock will reflect that, the price will show that. Now, today, tomorrow and next year it might be down but that’s noise. In the long run what we want is earnings growth and that’s what we focus on.
At Tetrault Wealth Advisory Group when it comes to pulling the trigger on stocks here’s the straight talk. One, we don’t listen to headlines and we don’t get trigger happy. Two, we focus on fundamentals. Three, we have a plan in place ahead of time so we can prudently execute when opportunity comes knocking. Thanks for watching.
I’m Rob Tétrault. Welcome to Straight Talk. Today we’re doing trends, crazes and manias. We’re going Dutch! Let’s go back 380 years, 1630s. We’re in the Netherlands. People are buying tulip bulbs. I just bought a tulip bulb. I sold it to someone else. I doubled my money. Fantastic news! I tell my neighbour about it. He’s upset! “How come I’m not making money?” You know what? Just go out there, mortgage your house, borrow some money and buy some more tulip bulbs. He made money. Now, Fredericks made money. Eugene made money. Everyone is making money. The next guy out there says, “I want to get in too.” So how do we do this? Let’s create a market where we can speculate and buy future delivery of tulip bulbs. Well, next thing you know everyone wants to buy tulip bulbs. He’s buying tulip bulbs. He’s buying tulip bulbs. We’re all buying tulip bulbs. Price goes up. Price goes up. Price goes up. Everyone’s in. What happens at the end? There’s nowhere to go but down. Fredericks lost his shirt. I lost my shirt, so did Eugene. We’re all broke. Nothing left. We’re bankrupt. That was the tulip mania of the 1630s.
Fast forward 380 years and we’re seeing a lot of the same mistakes made by Eugene, being potentially made by people on this planet. Asset classes such as Bitcoin may very well do well. It’s possible that everyone’s going to start adopting Bitcoin. We’re going to see it being used at Walmart and that Canadian Tire or Tim Hortons. It might happen, but for the valuation that we currently see, we need to have adoption across the board. And I don’t think that’s happened. In fact, I was on the Business News Network as a guest host in December 2017 and I said, “Don’t do this. It will not end well.” And we’ve seen this before. You guys remember the Dot Com bubble? It was crazy time. Everyone’s losing their mind, losing their shirts, buying Dot Com companies that had nothing but a domain name. Stocks were trading at 50, 500, 1000 times their earnings and eventually what happened, my cousin bought some Dot Com stocks. He made a lot of money. My other uncle, he also made money. Buyers, buyers, buyers, buyers. When there’s no more buyers, Eugene lost his shirt in the Dot Com bubble. Eugene, I know you’re out there. I know you’re listening, so I’m going to give you this straight talk.
1. Be wary of emotional, speculative assets such as Bitcoin and other euphoric bubbles. If your cousin told you that he sold a snowmobile and was able to double his money overnight, is that really an asset class you want to have? What I would ask you is, did he tell you about all the losses he had as well?
2. Eugene, if you’re going to invest in speculative asset classes such as Bitcoin, do it responsibly. No more that 5 to 10% of your portfolio. Make sure it’s money you can afford to lose, and please, no leveraging. Don’t go mortgage your house to buy a bitcoin or a tulip. It just makes no sense. You’ve paid that debt down. It does not make sense to speculate like that.
3. Own quality. Here’s what we do at Tetrault Wealth Advisor Group. We take away the mania, the craziness, the euphoric attitude and the emotion out of investing, so you don’t have to panic and stress out about that. At the end of the day, if you own quality, if you own companies with strong balance sheets, good management, good corporate earnings, your assets will grow. And over time you’ll be happy you own quality, because if there is a correction, your assets will be protected and that’s what we believe in. Don’t be a Eugene. Thanks for watching.
I’m Rob Tetrault, welcome to Straight Talk.
What we’re talking about today is the proposed taxes changes from Trudeau and Morneau. Now they announced this earlier this year, and in kind of a big brouhaha and kerfuffle and they used words such as closing loopholes, making sure the rich pay their taxes and bringing fairness to all taxpayers. In reality, the only people they targeted here were business owners and business owners are the lifeblood of our country. They create jobs, they make the market move, they create wealth through their own businesses and through the jobs that they create.
So let’s actually figure out what they have done here.
Income sprinkling
So income sprinkling means if I want to pay dividends to my kids, my wife, my grandkids, and they are shareholders of the corporation, they can receive dividends. And they are paying dividends at a favourable tax rate. Now income sprinkling is on the way out according to the government. So they are no longer going to let you pay dividends to those people.
So if I’m a shareholder at Tim Horton’s or at Canadian Tire, I don’t need to actually go serve coffee in order to collect my quarterly dividend from owning that stock. I don’t need to sell hockey sticks to get a dividend from Canadian Tire. Now in privately held corporations, like business owners across this wonderful country, they can no longer do that unless the wife or the kids or the husband is actively involved in the corporation, which is ridiculous in my mind, and in fact it is the only place in the world where they are going to have a reasonableness test for dividends.
Holding passive investments in a corporation
Now this is the second thing that they wanted to attack. So if I hold a corporation, I have a holdco, I can take the excess capital and I can grow my net worth and I pay a smaller tax rate there. Because remember, we don’t have pensions. Business owners don’t have pensions—They have to fund their own pensions. Well this is one way to even out the playing field. Well, they attacked that. The good news is that they did decide that they were not going to follow through on that. The only ones that they will attack are corporations that have passive income of $50,000 or higher. That is good news.
Three. They took a look at the capital gains strip.
The capital gains strip is an effective strategy to move an income to a capital gain thus reducing tax payable. A lot of people are doing it at a high net wealth level. They decided that they are not ready for it, they brought some measures forward, it’s not happening at this point.
So here is the Straight Talk.
With respect to dividends, if you are currently paying your children or your spouse dividends and being taxed at a low rate, continue to do that aggressively. Why not. The tax changes aren’t coming yet and when they do come, then we are going to want to consider potentially other strategies, such as an IPP, which is an individual pension plan, or other high-level tax planning strategies.
Two. With respect to passive income in a holdco or in an investment company, you want to get that passive income as high as you can before the tax changes come into effect, because they are likely going to grandfather any previous income.
Three. You’ve got to be aware of any and all potential future tax changes that are going to come. And for that, make sure that you are on top of things when Morneau or Trudeau announce anything, likely in 2018 or potentially in 2019.
Thanks for your time.
I’m Rob Tétrault. Until my son was born neither myself, or my wife Michelle had ever heard of Congenital CMV, the number one cause of infant disability in North America. After seeing the effects of CMV we wanted to make a difference. The result: the Canadian CMV Foundation and Le Classique, Western Canada’s largest outdoor 3-on-3 ball hockey tournament. So, if you’re 10th and 11th February at Whittier Park, it’s hockey, a Friday night social, live bands, kids activities, food, prizes and more. Proceeds help fund CMV Research. Register now at leclassique.ca.
Paul: What are people saying in Winnipeg about Bitcoin? And what are they saying about you?
And what are they asking you?
Rob: Well they’re certainly asking me, And I certainly get a lot of inquiries , And it’s something that I didn’t think I will feel as many phone calls or texts on my phone or emails about but it’s wrapping up lately obviously which brings us back to the old what do I tell the clients.
Well I tell them one that’s extremely speculative, obviously everyone who comes on the show says that.
Anyone who’s got any kind of background in economics, I think, would say that.
I tell them, I strongly encourage them not to participate, to stay away.
And then I also monitor on my own side, I monitor a couple tests , just to keep track of how bubbly I think we are and how close we are to the end.
Paul: What if they are insistent, what would you say to somebody who is insistent they want some bitcoin in their portfolio, how much of a … what kind of weighting would you reluctantly advise them to take on at these 17 thousand dollar bitcoin.
Rob: I would actually refuse to do it, I would refuse to participate in any way and I would go on record saying “I’m not going to advise you to do that”, and if they’re going to do it elsewhere or on their own or whatever, I would strongly advise them that it has got to be speculative, it’s got to be less than 5% of your portfolio at the absolute most, it’s got to be money you know you can lose because this is like going to the roulette table and there’s no number that wins, you’re taking your 15 thousand dollars/17 thousand dollars you’re putting it on a number that isn’t on the wheel in my view, so I feel that strongly about it.
And one thing I monitor Paul, I monitor a couple of tests that I kind of created over time.
One is the client inquiry test – so how many inquiries am I getting per day on my phone, on email of people reaching out to me saying “Hey, I want to buy Bitcoin” and what I’ve seen is it’s very similar to the curve of the price of Bitcoin, so now I’m getting multiple asks per day and I track them and I keep tabs of how many people are texting me per day, how many random people in the streets, you know everyone has heard about the taxi driver asking you about a stock tip, you should stay away from that stock – you should sell it.
Well the same thing with Bitcoin, now how many people are asking me and I still think though, for what it’s worth, that there’s a little bit of room here In the Bitcoin yet.
Paul: People want in because they’re seeing it as a high growth potential asset, if you’re steering them away from Bitcoin, if they want growth in their portfolios, what type of assets would you direct them to?
Rob: I preach quality, I’ve preached quality since day one to all my clients, I like to understand the cash flow, I like to understand how the company’s going to be profitable, I look at dividend growth.
My dad always says “I’ll buy Bitcoin when it pays a dividend”.
But realistically, it’s something that I would much rather own, if you’re going to go growth there are a whole bunch of sectors that exist that you can get growth in that are gambling but like tech or healthcare, there’s a whole bunch of growth sectors that exist in the US more than in Canada.
But if we get back to Bitcoin just for a second say “Ok, so how many people are in right now, we want to measure how close we are to the end of this bubble”
The bubble us going to burst, the bubble WILL BURST, mark my word folks, and when it does burst how much time do we have left so I think there’s still a little bit of time left because not everyone is in yet, Paul.
Paul: That is Rob Tétrault on Bitcoins, up next today is top business headlines including Hunter Harrison forced to take medical leave from his job as CEO of CSX, you’re watching The Street here on BNN.
Paul: We’re back with Rob Tetrault, he’s a portfolio manager at National Bank Financial. He’s based in Winnipeg. He comes to Toronto every now and again and when he does, we ask him if he can sit in with us. It’s a great day to have you here because Linamar, one of the biggest auto parts companies in this country and indeed on the planet, has made an acquisition outside of its core business, which of course is auto parts, into the agricultural sector. It’s purchasing a company called Macdon, which I had not heard of prior to today because it’s not a publicly traded company but you’ve heard of it because it’s a Winnipeg company.
Rob: It is. I love coming on here and talking about Winnipeg stories or Manitoba stories. I’m a proud Manitoban. This is a great story. This is a family-owned business. They’ve been in Winnipeg for 70 years or so. Very successful. A lot of people work there. It’s one of the big players in Winnipeg. I actually know some of the executives there and they sold for a billion dollars. Obviously, for them, we don’t know what the multiple is. We will never know that. It’s a private company but obviously, if they decide to sell a family-owned tightly held company, it must have been a good price. I also like it for Linamar as well.
Paul: Why do you like it from Linamar’s point of view? It’s clearly a diversification play by Linamar out of the core market segment. Linamar does have an agricultural segment already. It’s based in Hungary I believe. These operations are going to be combined in a corporate way with the Hungarian operations. Why do you like it from Linamar’s point of view?
Rob: Two reasons. One, obviously it’s a creative and it’s immediately adding to cash flow. They will be able to obviously…and I hate that some probably Winnipeggers might lose their jobs long term, but they will be able to add to the bottom line simply by economies of scale. Two, the big one. Anytime I see a deal, Paul, I always look at the metrics, “Did they issue debt or did they raise capital?” They did not raise capital for this, they issued debt, which means they’re paying 4% or whatever their rate is, probably in the four and a half range. They’re getting something a creative at the 10 to 12 percent range so that’s going to be a multiplier. I think that’s a great deal for them.
Paul: You like the fact that the shares are not being issued and the share base is not being diluted down.
Rob: Correct. We don’t want dilution. If I’m an owner of Linamar I don’t want dilution, I don’t want to dilute 10% just to get 10%. I want to be able to pay with debt. Provided the leverage ratios make sense, and I think they do for them, I think no dilution. Likely a very good play.
Rob: New Flyer is another Manitoba companies.
Andrew: The bus maker.
Rob: The bus maker, and they’ve acquired Motor Coach Industries, tons and tons of synergies there. In my mind, the market is underestimating what those synergies are going to be, and Soubry is a great CEO and they’re doing it the right way for sure.
Speaker 1: What’s interesting to you right now in this crazy market environment, Rob?
Rob: Well, I’m really interested in oil. I really like financials. Somewhere near here in my mind there will be a bottom in the next…whatever it is, three, six, nine months. I do know that long-term I’ll be happy that I bought financials around this time.
