Gravitas: Shares or Shelter

February 10, 2023 | Michael Newton


The Newton Group Insights

The Canadian real estate market has enjoyed a prolonged period of tremendous price appreciation. Understandably, this has inspired debate in recent years as to whether the stock market or real estate has been a better long-term investment. On balance, we believe the historical data paints a more nuanced picture than commonly perceived. The persistent strength of many Canadian housing markets over the last decade has arguably left the general population with the impression that real estate is a more compelling long-term investment vehicle than other asset classes such as equities. Looking back over the past two decades, however, we find that both the stock market and real estate have delivered attractive long-term returns. From January 1st, 2000 to Dec 31st, 2022, the TSX Composite has generated annualized total returns of 7.5%. While Toronto has generated 7.0% and Vancouver has enjoyed 7.1%. The national average is less, at 6.6%. While it may be tempting to extrapolate from housing’s recent strong run when forming future expectations, we note that time horizon matters and the TSX Composite has more than kept pace with many local real estate markets. Of course there are other important considerations, such as the impact of leverage (mortgage) on returns, differences in the taxation of capital gains, the impact of fees, taxes and maintenance, and whether a primary residence should be viewed as an investment, but our main takeaway is that any direct comparison between the stock market and residential real estate is likely to be a flawed exercise. One advantage of shares is they are liquid, but they also come with a month-end statement. Although real estate is illiquid, at least it doesn't remind you of its valuation every month. Understanding the tradeoffs and differences between the stock market and real estate is crucial. While the stock market tends to be more volatile, a review of the historical performance supports the view that equities have been an equally attractive means for investors to build wealth over the long term relative to real estate in Canada. It is also worth noting that real estate and stocks are not a mutually exclusive decision and a residential property can certainly play a role in one’s overall investment portfolio.


Should you have any questions or concerns, please feel free to reach out.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(+) Cameco (CCO-T) The uranium player beat Q4 top and bottom line estimates. Revenue of $524M (+12.7% Y/Y) beats by $190.6M. They have $2.3B in cash and cash equivalents and short-term investments and $997M in long-term debt. 2023 guidance provided, returning to tier-one run rate: Our outlook for 2023 is beginning to reflect the transition of our cost structure back to a tier-one run rate, as we plan our production to satisfy the growing long-term commitments under our contract portfolio. For 2023 we have committed sales volumes in our uranium segment of between 29 and 31 million pounds. Expects revenue of $2,120 to 2,270 million vs $1.72B consensus. Cameco shares have gained 19% so far this year and 37% during the past year. Owned in Core and Opportunity Portfolios.

(-) Chipotle Mexican Grill (CMG-US) reported worse-than-expected fourth-quarter results. Its adjusted earnings per share of $8.29 were shy of the $8.90 expected, while revenues of $2.18 billion missed the $2.23 consensus estimate. This marks the first time since Q3 2017 that it’s missed both Wall Street estimates. Net sales rose 11.2% YoY, but same-store sales growth of 5.6% fell short of the $6.9% expected by analysts and management’s guidance. The company expects same-store sales growth in the high-single digits for Q1 2023. It also plans to open 255 to 285 new locations this year. Its recent price hikes to keep up with rising costs could be starting to impact customer traffic. Despite earnings-per-share and revenue misses, the company sees Q1 high-single-digits comps versus 6.7% increase expected. Big reset with costs under control means this should be a good year. We increased our weighting this week on market weakness. Owned in US Portfolio.

(+) Constellation Software (CSU-T) Lumine spin-out approved for listing. Recall that Lumine (a subsidiary of CSU), entered into an agreement to acquire WideOrbit, a U.S. based VMS (Vendor Management Software) provider in December 2022. At the time, CSU also publicized its intention to spinout Lumine on a standalone basis. Those that own CSU as of February 16 (record date), will be entitled to 3 Lumine shares via a special dividend effective February 23. RBC estimates that the spinoff will be worth about $53 per CSU share or ~2.3%. It's also important to note that Lumine will trade on the TSX Venture and we believe liquidity could be challenging for larger accounts. As a result, Lumine will unlikely be a core holding for us. Finally, with respect to tax implications, the spinoff will be regarded as a taxable dividend. Owned in Core Portfolio.

(~) Danaher (DHR-US) said that the name for its Environmental and Applied Solutions spinoff will be Veralto. The ticker will be VLTO. The spinoff should happen in Q4. Danaher is also rumoured to be interested in buying Catalent (CTLT). The market is taking it seriously. Shares of CTLT jumped nearly 20% on Monday and another 7% on Tuesday. Catalent provides delivery technologies and development solutions for drugs, biologics and consumer-health products. Owned in US Portfolio.

(+) Disney (DIS-US) said revenues for the past quarter—during which Bob Iger returned to the helm—rose by 8% year over year to $23.5 billion, beating expectations. Losses at the streaming unit, which includes Disney+, totalled $1.1 billion, though the number of subscribers held up better than expected. As Disney enters its 100th anniversary with a new chapter focused on rationalizing its streaming business to position it for sustainable growth and profitability while reducing the company’s overall cost profile. Key highlights include a strategic reorganization, a $5.5 billion cost savings plan, and a drastic evolution of the company’s Direct To Consumer vision (shifts across the programming focus, global footprint, and pricing). The media giant said it would lay off 7,000 people, about 3% of its global staff. In addition, Nelson Peltz declared the proxy fight between his firm, Trian Fund Management, and Disney was over. Owned in US Portfolio.

(+) Enbridge (ENB-T) Another solid quarter. EBITDA was right in-line with RBCCM’s estimate while DCF came in slightly above. There were also no major variances amongst the core segments. The leading transporter of crude oil and natural gas in North America, delivered 3.1 million barrels of oil per day on its Mainline system, slightly higher than the 3 million bpd delivered a year ago. Shares offer an attractive dividend yield of 6.5%. Owned in Cash Flow Portfolio.

(-) Franco-Nevada Corporation (FNV-T) This week, First Quantum Minerals said its Minera Panama subsidiary, the operator of Cobre Panama copper mine, suspended concentrate loading operations at the Cobre Panama port. The move comes amid a dispute between the government and the company over how much tax First Quantum should pay on its concession for Cobre Panama, which represents more than half of the company's EBITDA as well as 3.5% of Panama's gross domestic product. Unfortunately, Franco Nevada's royalty and streaming agreement with Cobre Panama comprises 18% of its revenues. Owned in Core Portfolio.

(+) Fortis (FTS-T) reported an in-line quarter as expected. The rate base growth of ~6% per annum was maintained through 2027, supportive of an annual dividend growth rate of 4-6%. Utility valuations corrected in late 2022 and FTS is now trading approximately one turn below its 5-year average on forward earnings. Overall, FTS remains the regulated utility of choice in our opinion and is appropriate for those seeking defensive exposure and stable income. Shares yield 4.21%. Owned in Cash Flow Portfolio.

(+) iShares CORE MSCI Emerging Markets ETF (IEMG-US) Ever since they began to be viewed as a coherent asset class about 30 years ago, there has been a marked inverse relationship between the dollar and US rates. Outside of China, EM is largely a short dollar trade. We think that can continue. China is an idiosyncratic story. It has outperformed meaningfully and we see a little bit more upside there. Avoiding a US slowdown (or recession) is ultimately a good thing for risk assets. In the longer run, the valuation of emerging stocks remains very appealing. The EM discount at present is as high as it has ever been. Currently EM remains a geared play on the rest of the world. Whatever you think is going to happen to the US and western Europe will happen in spades to the developing world, in either direction. We do think that overall emerging market valuations in aggregate are pretty reasonable, and that the growth trajectory looks good. Owned in Core Portfolio.

(+) Linde (LIN-US) The U.K.-based global industrial gas and engineering company, reported mixed headline results but an overall strong fourth quarter. Investors reacted favourably to the results. Revenue fell 4.8% from the year-ago period to $7.9 billion, missing the $8.4 billion consensus estimate. Adjusted earnings of $3.16 per share — up 14% year over year — exceeded the $2.91 estimate and was well above guidance of $2.80 to $2.90 per share. Additionally, adjusted operating profit rose 8.7% to $2 billion, beating expectations of $1.88 billion. Once again, management over-delivered to cap off fiscal year 2022, delivering record operating margin, earnings, and return on capital for both the fourth quarter and on a full-year basis. This marks the ninth quarter in a row of 20% or better annual earnings growth —especially remarkable during multi-decade high inflation. Owned in Opportunity Portfolio.

(+) NVIDIA Corporation (NVDA-US) JP Morgan believes NVDA is the pioneer and market leader in off-the-shelf semiconductor solutions (GPU compute acceleration chip) and platforms (hardware and software) that accelerate the complex training/deployment of new AI-based frameworks. These include generative AI and large language/transformer models like OpenAI’s GPT-3/ChatGPT large language model. NVDA is also the clear leader with its silicon, software, hardware systems and full-stack ecosystem. The team is driving $17B this year in accelerated datacenter compute, networking, and systems/software sales. NVDA's datacenter business will grow at 30%+ CAGR over the next 5 years. We continue to like NVDA here as they are on the cutting edge of graphics chips, along with the secular growth in datacenter compute. Owned in Opportunity Portfolio.

(+) Roper (ROP-US) Despite being range-bound since the summer of 2020, Roper Technologies' stock represents a decent risk/reward opportunity for long-term shareholders. The points of resistance in the stock seem twofold. First, the capital markets appear to not be taking kindly to leveraged deals where the benefits accrue many years in the future. Second, others contend that Roper’s historical organic growth profile under earned its potential. We’re less concerned about the first contention, which we think is fallout related to rising rates and macroeconomic uncertainty. On the second point, we think the market fails to appreciate a few things. First, under CEO Neil Hun, Roper has focused on improving its organic growth in a systematized fashion. Broadly speaking, Roper has very entrenched positions in niche markets with small total addressable markets. Roper acquires software companies with large amounts of deferred revenue. Large quantities of deferred revenue exist because many software businesses receive cash far in advance of when services are rendered. Roper uses this cash to invest in businesses at incrementally higher rates of return. Its targets have large bases of recurring revenue in oligopolistic, niche markets with small total addressable markets. That revenue base is protected by strong switching costs that frequently post gross retention rates greater than 95%. Roper’s businesses typically don’t own their own infrastructure, which further contributes to its asset-light business model. From 2003 through today, Roper’s net working capital as a percentage of sales has dropped from 18% to negative 17%. Amazing really. Owned in Core Portfolio.

(++) Sonos (SONO-US) shares surged after the premium audio speaker company reported strong upside with its Q1 (Dec) earnings. Speakers make great gifts so the holiday quarter is usually the company's strongest of the year and they did not disappoint. Sonos beat handily on EPS. Revenue grew just 1.2% yr/yr to $673 million. That may seem small, but analysts were forecasting a 12% decline, so that was a good result. Sonos also reaffirmed FY23 revenue guidance. The company noted that consumer spending has been rather tepid, especially as the pendulum has swung away from goods and towards travel and services. Sonos built upon its already strong share of the home theatre market and saw significant gains in the US, UK, Germany and the Nordics, resulting in its highest share in three years. Owned in Opportunity Portfolio.

(+) SmartCentres (SRU.UN-T) has a relationship with one of the strongest retail players, Walmart (25% of revenue), and its portfolio has consistently achieved industry leading occupancy rates (97% or better). In addition, the REIT’s development platform provides expertise and a foundation for growth. We note that SmartCentres has built more than 170 predominately Walmart-anchored centres over the past 20+ years. This week's earnings struck a confident tone, while sensibly minding the till. Aided by the strength of Walmart’s consumer and tenant draw, we believe the REIT’s portfolio is well suited to navigating potential headwinds as economic traction slips. Trading at a 7.2% implied cap rate and the steepest NAV discount among its retail peers, we see an attractive risk-adjusted return. Units yield 6.74%. Owned in Cash Flow Portfolio.

(-) Telus (T-T) reported a healthy quarter, with revenue and earnings all in line and overall decent numbers across the board. 2023 guidance pointed to 11-14% revenue growth and Adj. EBITDA growth of 9.5%-11.5%. Shares dipped as Free Cash Flow (FCF) guidance was $2B versus consensus that had estimates closer to the $2.5B range. The guide still represents solid growth but it did come in below many analysts’ estimates. That being said, a major positive to come out of this report is that they are now done with the fibre build, which has been a decade long project, and capex intensity is expected to drop to about 13% and continue to move lower. Couple that along with the fact that Telus is now in a position where they can decommission copper on the network, translating to cost efficiency going forward, and you have a rather differentiated telecom company in the space. Shares currently yield 5.19%. We added to our position on market weakness. Owned in Core and Cash Flow Portfolios.

(+) TransDigm Group (TDG-US) reported fiscal 1Q23 revenues of $1.397B (up 17%). EBITDA margins were 50% (47.3% in fiscal 1Q22), and adjusted EPS was $4.58, compared to our estimate of $4.51. TransDigm operates as a holding company with a clear, consistent strategy: acquire businesses with proprietary aircraft components, primarily sole-source products, with high aftermarket content. TransDigm’s businesses manufacture and sell replacement parts for ignition systems, pumps, actuators, and flight controls, among other things. Since aircraft must be fully maintained to be operational and TransDigm is the only provider of many of their products, the company has significant pricing power. The firm operates with a high degree of financial leverage to amplify operating results. This strategy works because potential competing spare parts must be licensed by the Federal Aviation Administration to be identical to the original product. Since TransDigm’s designs are proprietary, it is challenging for would-be competitors to prove that their design is identical. This barrier to entry allows TransDigm to extract value from regulator-required maintenance and enables the firm to aggressively price spare parts. TransDigm is highly decentralized and has numerous business units. Owned in Core Portfolio.

(+) Wynn Resorts (WYNN-US) Shares of the hotel and casino operator gained after they reported $1 billion in revenue for the fourth quarter, topping analysts’ expectations of $958 million. The results prompted analysts to declare Las Vegas is heating back up. Owned in Opportunity Portfolio.

Weekend Reading

Corporate life insurance: A planning tool for each stage of your professional journey This recent article from MNP is quite good. It’s a clear and concise piece on corporate insurance. MNP

Everything You Can’t Have Nothing is as desired as much as the thing you want but can’t have. MORGAN HOUSEL

GE Hitachi Signs Contract for the First North American Small Modular Reactor GE Hitachi Nuclear Energy (GEH), Ontario Power Generation (OPG), SNC-Lavalin and Aecon have signed a contract for the deployment of a BWRX-300 small modular reactor (SMR) at OPG’s Darlington New Nuclear Project site. This is the first commercial contract for a grid-scale SMR in North America. GE

Be Macro Aware, Micro Obsessed How much should you pay attention to the macro environment, vs the tactical and strategic problems of everyday business? Source: Software Snack Bites SOFTWARE SNACK BITES

The Future Looks Messy for Passive Investors The winners of tomorrow are not the winners of yesterday. So why hold a fund that mostly tracks the latter? BLOOMBERG OPINION

What is Canada’s potential in quantum computing? RBC Disruptors podcast explores this with Christian Weedbrook, CEO of Toronto-based Xanadu. RBC DISRUPTORS

Silicon Valley Bank has released their 'State of The Markets' focused on the innovation economy. SILICON VALLEY BANK

What does a lifetime of expenses look like? 4 observations: We don’t put enough attention on taxes. If you’re an addict, you’re a sucker. One big decision can outweigh thousands of little decisions. We don’t spend enough on Education. ERIC JORGENSON

“Bureaucracy defends the status quo long past the time when the quo has lost its status.”

– Lawrence J. Peter