Canada’s debt servicing ratio rose to 15% at the end of Q2. Growth in mortgage borrowing remained slow at 0.8%, consistent with softer home resale markets, and consumer credit growth slowed to 0.5%. Mortgage debt accounts for three quarters of Canadian households’ outstanding credit market debt. Household debt payments rose faster than the pace of disposable income growth in Q2. The BoC’s shift to a gradual interest rate cutting cycle will help to cap that ratio in the year ahead, but interest rates are still at relatively high levels and debt payments will continue to rise, on average, in the near-term as additional waves of mortgage renewals (with significantly higher corresponding payments) are expected into 2025. The bottom-line is this: The Bank of Canada needs to speed up the rate cuts!
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Portfolio Notes
(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral
(+) Cameco (CCO-T) and other uranium producers rallied following a report that Russian President Putin is considering limiting exports of uranium, titanium and nickel in retaliation for Western sanctions. "Russia is the leader in reserves of a number of strategic raw materials reserves," Putin told government ministers in a meeting shown on TV, and since Western sanctions limit exports of some Russian commodities, "maybe we should think about restrictions [on] uranium, titanium, nickel," while adding that such limits should not harm Russia. Owned in Core and Opportunity Portfolios.
(-) Canadian National Railway (CNR-T) lowered its forward guidance due to impacts from the recent labour strike, Alberta wildfires, and weakness in Forestry and Metals. Management has also reported that a recovery from many of these clients has been slow. While much of this has been expected, details like the delay in recoveries may be more of a surprise, weighing on the stock this week. We struggle to find a catalyst in the near term and consensus believing that CP is doing a better job at managing through similar headwinds, we continue to favor CP has our rail of choice. Owned in Core and ESG+ Portfolios.
(+) Dollarama (DOL-T) Very strong Q2 report from DOL this week, especially given the context of weak reports from DOL’s U.S. C-store counterparts like Dollar General and Dollar Tree. Same Store Sales comp of 4.7% was slightly ahead of consensus, and showed how DOL remains a preferred “value destination” for the Canadian consumer through the cycle. Valuation remains slightly elevated relative to history (18.5x EBITDA), so it's not the timeliest idea for new money, but we think the multiple is justified given the strong underlying results in a challenging environment. We remain constructive on DOL as a defensive growth idea and consider it to be a core portfolio holding. Owned in Cash Flow Portfolio.
(+) First Solar (FSLR-US) was a big gainer this week as the consensus thinking believes Vice President Harris came out stronger from last night's debate with former President Trump. Investors believe a Harris win would benefit clean energy stocks, which have received tax credits through Biden administration's Inflation Reduction Act. Harris also repeated that she would not ban fracking if she became president. Owned in ESG+ Portfolio.
(-) JPMorgan Chase (JPM-US) noted that Net interest income expectations and consensus for 2025 are 'too high' and expects NII come down. Despite the 5% selloff in JPM’s shares we remain positive on the name as we believe the stock reaction was overdone. Nevertheless, JPM is up 21% year-to-date, outperforming the S&P 500. The stock trades at a forward P/B multiple of 1.6x, a premium to its historical long-term average of 1.3x. We would continue to own the stock as it is a premium bank. Owned in US Portfolio.
(~) Restaurant Brands International (QSR-T) RBC analysts attended a lunch meeting with QSR’s CEO and came away constructive that the company’s recent investments (‘Reclaim the flame’ initiative, Carrols acquisition) should enable them to deliver strong long-term growth. The company is targeting refreshing 85% of its BK restaurants by 2028 and is investing in improving the quality of service at all its restaurants, which should help drive solid top line growth. In addition, there remains a substantial unit growth opportunity (QSR currently operates 31k restaurants and aims to reach 40k restaurants by 2028) which can help drive earnings growth in the high-single-digits over the next several years. McDonalds, for reference, operates 43k stores globally. The balance sheet remains in decent shape, with a leverage target at 4.5x by the end of this year, with long term target of 3x-5x. Valuation (13x EBITDA) has recently declined on the back of a weak consumer, and we think the current level is a good entry point for long-term money. Owned in Core Portfolio.
(+) Uber (UBER-US) and Waymo, the self-driving car company owned by Google's parent Alphabet, have expanded their existing partnership to bring autonomous ride-hailing to Austin and Atlanta next year. Waymo plans to use the Uber app to offer paid rides in Atlanta and Austin, Texas starting early 2025. Uber will manage and dispatch a fleet of Waymo’s fully autonomous, all-electric Jaguar I-PACE vehicles in these cities, that will grow to hundreds over time. Owned in Core, ESG+, US and Opportunity Portfolios.
(+) Viking Therapeutics (VKTX-US) Shares jumped after JPMorgan initiated coverage of the biotech company competing in the GLP-1 space with an overweight rating, saying an upcoming data readout in November will be a positive catalyst for the stock. The Wall Street firm issued an $80 price target implying more than 40% upside. Owned in Opportunity Portfolio.
Company of the Week: Dollarama
DOLLARAMA EARNINGS PRESENTATION
Weekend Reading
RBC MacroMemo - September 10 – 23, 2024 Payrolls vs stabilization elsewhere / Central banks / Rate asymmetry / USMCA trade agreement/ Canadian housing / Quick hits (including Cdn politics, hurricane, Germany and UK) RBC
Despite confidence in financial habits, Canadians continue to make money mistakes RBC survey reveals that 75% say they have strong financial habits, yet 73% admit to actions over the last year that could be hurting their financial wellbeing. 2024 RBC FINANCIAL HABITS POLL
When Smart Money is Wrong Commentary on why Smead Capital is sitting through a correction in oil and gas stocks and are patiently waiting for the smart buyers to show up like they did in 2020-2022. BILL SMEAD
Boomer Apple Apple held the line on prices once again; I should have realized the company really is in a different stage. BEN THOMPSON
Restaurant Math Isn’t Working Six chefs and restaurant owners from across the country explain why restaurants feel so expensive right now, and how they’re coping with high prices and customer complaints. EATER
Canadians still want to tip 15% About 53% of 1,200 respondents in a Narrative Research survey said that was the amount they would tip at a sit-down restaurant, with 17% opting to tip 5%. The findings come as some restaurants have increased default tip options on payment terminals asking for tips as high as 25%. Most respondents also didn’t want to be asked for a tip when it comes to takeout food. Only 7% said a tip could be appropriate at retail stores. NARRATIVE RESEARCH
"In bear markets, stocks usually open strong and close weak. In bull markets, they tend to open weak and close strong.”
- William O'Neil