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Recent News and Insights from Veritas
Table of contents for 2022:
September 14, 2022
Canadian Tire’s rise in past-due accounts might be a big red flag
August 3, 2022
Insurance Investors: What you need to know about IFRS-17
July 28, 2022
What to Watch in a Nervous Housing Market
June 6, 2022
Veritas Weekly Journal
Time to Pay Up the Bezzle; Bonds or Real Estate? Investomania
May 5, 2022
Episode 91: Why Bitcoin Isn't Digital Gold
February 23, 2022
The Canadian banks will show softer earnings results this quarter
February 9, 2022
Analyst cuts five of Big Six banks to sell on rate-hike fallout
January 27, 2022
Fact-Finding Video Conference Series Episode 83
Tapping into the Instincts to be Healthier and Outperform (free to view)
September 14, 2022
Canadian Tire’s rise in past-due accounts might be a big red flag
Globe & Mail columnist David Milstead quoted our Consumer Staples & Consumer Discretionary Senior Analyst Kathleen Wong in this article about the risks in Canadian Tire's credit cards business. She is the sole analyst with a “sell” on the Street, believing losses on bad debt in the card portfolio will, by the end of this fiscal year, be double last year’s numbers, and higher than pre-pandemic levels. That will continue with higher loss levels in 2023, she models. In a report for clients in July, she listed Canadian Tire as one of the most vulnerable stocks in her sector coverage if there is an economic downturn.
Clients may see the full report: Consumer Staples and Discretionary: Recession Risk Rising
The Financial Post quoted our Financial Services Analyst Nigel D'Souza in a story setting up Q3-F22 earnings for the Big Six Banks.
“I think (results will) be received very positively and you could see a rally for bank stocks because of how negative sentiment has been over the recent months,” Nigel said. “I think (bank CEOs will) certainly acknowledge the uncertainty in the outlook, I think they’ll acknowledge macroeconomic headwinds that are being faced by consumers and businesses from rising rate inflationary pressures (and) slowing economic growth."
D’Souza continued: “I think all that will be recognized, but there’s a difference between recognizing those risks in the outlook and the actual impact of financials. I think the impact of financials will be minimal this quarter, I think it’s too early to start seeing a significant buildup in credit loss provisions.”
August 22, 2022
Far too early to sell Canadian bank stocks today for credit losses that are a year out
Our Financial Services Analyst Nigel D'Souza joined BNN Bloomberg to discuss the Q3-F2022 earnings season for the Big Six Canadian banks, which starts August 23 with Bank of Nova Scotia reporting.
You may recall that he went negative on the sector in February when he didn't think the market appreciated the impact that steep interest rate hikes would have on valuations.
Last week in a report for clients, he upgraded Bank of Nova Scotia (TSX: BNS), Canadian Imperial Bank of Commerce (TSX: CM) and Toronto-Dominion Bank (TSX: TD) to BUYs as the sector was down about 15% from its peak in January/February and was trading at ~9.5x forward P/E multiples.
Bank of Montreal remained a BUY, while he upgraded National Bank (TSX: NA) to REDUCE from SELL, and kept Royal Bank (TSX: RY) at REDUCE.
"When you look at what happened to bank valuation multiples this year, they peaked at about 12x forward earnings in January and February," Nigel said. "Recently they bottomed at around 9x to 9.5x forward earnings. If you look at past cycles, typically bank stocks tend to bottom at around 9x, with the exception of the Financial Crisis [of 2008-2009] where they undershot that at close to 8x. The issue with valuing bank stocks today at cyclical bottoms is that historically there is a lag, and a pretty substantial lag, between when interest rates increase and credit losses start showing up across the banking sector. It can take up to two years."
"I think investors have front-run the impact of interest rates because of the hyper-awareness of monetary policy," he said. "It is far too early to sell the banks today for credit losses that are probably at least a year away."
Nigel also discussed his earnings expectations, his upgrades last week and why TD is his TOP PICK.
Our Financial Services Analyst Nigel D'Souza recently appeared on BNN Bloomberg and was quoted in a recent article on its website helping investors understand upcoming accounting changes for life insurance companies.
The new International Financial Reporting Standard for insurance contract accounting (IFRS 17) requires insurance companies to break out the source of earnings between insurance and investment-related operations, such as wealth management.
“The issue [currently] is that life insurance companies don't split this out,” said Nigel told BNN in an article. “I think [IFRS 17] will lead to better comparability and more consistency.”
IFRS 17 will also require insurance companies to recognize earnings from insurance products over their associated contract length, rather than upfront as they are now.
“The main impact of IFRS 17 is that adjusted earnings are expected to decline across the board on transition simply because instead of recognizing the profit upfront, you're now recognizing it over the lifetime of that contract,” Nigel said. “So it reduces the run rate of earnings.”
Nigel said he believes the new standard will have the biggest impact on Manulife given the company’s net new business gains for insurance contracts, which totalled more than $1 billion in fiscal year 2021, account for approximately 20% of its post-tax adjusted earnings.
Overall, he thinks IFRS 17 will be good for investors, even if it reduces earnings in the near term.
"Insurance is a very complex and complicated business model. It can be a bit of a black box sometimes, where it is difficult to understand the drivers, variables and factors that affect the P&L and the balance sheet," he told BNN in his televised appearance. "I think that opaqueness and complexity make it challenging for investors to sometimes price in all the risk factors. IFRS 17 is a step towards improving the transparency and enhancing the comparability of results."
Read the BNN article: Lifecos face 'really epic' accounting change - here's why it matters.
Or watch the video: A new international accounting standard will have the biggest impact on Manulife: Analyst
With so much nervousness in the housing market these days, we recently held an in-depth webinar for our clients to provide our take on current market conditions and thought we'd share with our followers what we think is one of the most important charts to watch.
We have studied the data and not surprisingly, house price declines are highly correlated to months of available housing inventory (MoI). It makes sense. When supply exceeds demand, then prices fall. But specifically, we have seen substantial house price declines in the past when housing inventory exceeds six months across Canada or three months for Toronto.
So where are we now?
MoI for Canada has moved up to two months, so we're still a long way from six months. But for the GTA, it has moved up sharply to two months from a low of 0.32 months in December 2021, as it continues to be a market more sensitive to supply and demand swings.
Keep in mind, that MoI is a leading indicator, so if the Canada-wide indicator moves up to six months in the fall, then prices may not fall sharply until the spring of 2023.
Hold the date: We'll be hosting our 10th Annual Veritas Great Canadian Housing and Real Estate Conference on October 6 at the National Club and online. We think it's the most relentlessly honest housing conference you'll find in Canada. More details to come.
GTA Housing Months of Inventory has increased substantially from a record low
Source: CREA, TRREB, REBGV, Veritas
July 28, 2022
'Calm before the storm': Canadian banks expected to start shoring up reserves as consumer credit risks build
Canada’s big banks may need to start shoring up their loan-loss provisions as the economic cycle turns and they eye growing consumer credit risks. “Given cycle highs in household leverage and the fastest pace of interest rate increases in over twenty years, we expect provisions for credit losses (PCLs) in the upcoming cycle to match or potentially exceed PCLs during the global financial crisis (GFC),” Veritas Financial Services Analyst Nigel D'Souza wrote in an extensive recent report for our clients that is quoted in this National Post article. Although he expects PCLs in the medium term to marginally exceed PCLs in the GFC, he does not expect systemic risk that would warrant or necessitate raising capital.
Canadian bank stocks tumbled again last week after the Bank of Canada's interest rate hike and now have underperformed the S&P/TSX Composite this year. Is it time to buy them yet?
Our Financial Services Analyst Nigel D'Souza was on BNN Bloomberg recently to provide his outlook on the sector.
As you may recall, he downgraded five of the Big Six banks in early February on concerns about high inflation and rapid interest rate hikes. The group is now down about 15% for the year and 20% from the peak (as of July 18 in the chart below).
Bank stocks are trading at about 9.5 times forward earnings, which is still above where they bottomed during past cycles, Nigel said. Earnings estimates could also still be too high, as they may not yet reflect lower loan growth from slowing economic activity, as well as lower profits from capital markets and wealth management due to market volatility.
"The largest and probably most important factor is an uptick in credit losses and credit loss provisions due to rising interest rates. The only question is how high and how severe those losses could be."
Nigel said the bank stocks could still fall another 5%-15% before we find a true valuation bottom.
He also offered his thoughts on what a recession could do to loan losses and the sector.
TSX versus TSX Bank Stock Performance in 2022
Nigel D’Souza, our Financial Services Analyst, told BNN Bloomberg that the negative impact from rising rates or slowing growth is unlikely to be reflected until next year, but investors are getting ahead of that. Noting the record levels of debt in Canadian households, he expects a negative outlook for the banking sector if the BoC’s policy rate moves beyond 3%.
We held a recent video conference for our clients that we thought others may also find helpful in navigating the difficult markets. The video was from our Fact-Finding Video Conference Series and was with Steve Foerster, a Professor of Finance at the Ivey Business School at Western University.
Professor Foerster received his Ph.D. from the Wharton School, University of Pennsylvania and has obtained the Chartered Financial Analyst designation. He has published over 50 articles in journals, such as the Journal of Financial Economics, the Journal of Finance and Financial Analysts Journal. Professor Foerster's most recent book is In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest, written with Andrew Lo, from MIT Sloan School.
In episode 94 of our Fact Finding Series, Professor Foerster and Anthony discussed:
• Three P's of investments: Principles, Process, and Path (you can also follow along on the book's website);
• The seven Principles for investors to follow and develop the Perfect Portfolio;
• The Struggles of the 60/40 portfolio: "Sometimes, just when we want the benefits of diversification, they're not always there because we have assets becoming correlated. But I think that's where staying the course really, really helps."
• Is there one perfect portfolio? "There is a portfolio that is perfect for each of us at a particular point in time. It's not going to be something that is never going to change. Clearly, as we go through different life cycles, then your portfolio should change."
If you would like to hear more about Veritas, please sign up for our free News and Insights Newsletter.
June 6, 2022
Veritas Weekly Journal
Time to Pay Up the Bezzle; Bonds or Real Estate? Investomania
The Veritas Journal is the weekly newsletter that we send to our clients in which we highlight our research, news and market events of the week.
We think we've found the perfect word to describe today's markets.
Economist John Kenneth Galbraith took bezzle from the word embezzle to describe the time between when "an embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss." It could take a day or months or years before the man who has been embezzled feels the loss. In the meantime, he enjoys a net increase in "psychic wealth."
The more you think about it, the better the word bezzle gets. The word also seems very underused.
Please enjoy complimentary access to this issue and feel free to share with others.
Our Financial Services Analyst Nigel D'Souza was on BNN Bloomberg yesterday to discuss how the Bank of Canada's second-consecutive half-point rate hike impacts the outlook for Canadian bank stocks.
The BoC signalled it will continue to raise rates until inflation is under control, but Nigel believes there is a disconnect when it comes to how many rate hikes that will take.
He thinks yesterday's hike and another 50 basis point hike in July (which would take the rate to 2%) are already priced into the markets, but that further rate hikes are not being factored in by equities investors yet.
"It's not certain that equities investors have woken up to the fact [that rates will be much higher than they expect by the end of 2022]," Nigel said, explaining why he thinks bank stocks could hit another inflection point.
"I think the Bank of Canada will move above 2% because when you think about the last rate hike cycles in 2017 and 2018, they stopped hiking at around 2%. This year, we're sitting at multi-decade highs in inflation. Expecting the BoC to stop hiking rates at 2% is a bit optimistic."
Nigel downgraded five of the Big Six bank stocks near the beginning of February and continues to believe sector valuations could still fall further.
May 24, 2022
Historically, valuation multiples for banks have bottomed when credit losses peak: Analyst
Our Financial Services Analyst Nigel D'Souza was a guest with Andrew Bell on BNN Bloomberg discussing his outlook for Canadian bank earnings. The Big Six banks are reporting their earnings this week.
Nigel explained that the best time to buy bank stocks historically has been when provisions for credit losses have peaked. Usually, credit losses peak about two years after interest rates start to rise.
"As debt servicing costs move up through 2022, theoretically, we may not see a peak for credit losses for the banking sector until 2024," Nigel said, adding that credit losses could peak sooner because of the rapid pace of interest rate hikes and changes to accounting standards that now force banks to recognize credit losses sooner than in previous business cycles.
"Historically, the peak in credit losses also coincides with a bottoming of valuation multiples," Nigel said, explaining that investors were paying about 12 times forward price to earnings multiples at the beginning of the year and are now paying about 10 times as bank stocks have fallen. "If you look at past cycles, the sector multiple tends to bottom closer to 9 times. We could have a bit more to go here in terms of valuation multiple contraction."
They also discussed:
• Why Veritas doesn't rate stocks a Hold ("You've got rid of Holds, that traditional fudge that the rest of the industry uses," Mr. Bell said. "Holds always seem like such a cop-out."
• Why Bank of Montreal is Nigel's only Buy-rated bank of the Bix Six.
• Why National Bank of Canada is his only Sell-rated bank of the Big Six.
Clients: For more, please see Nigel's industry report Canadian Banks: Stuck between Rising Rates and a Hard Place.
May 19, 2022
How the automotive supply chain crisis is leading to efficiency and investment opportunity
Our Industrials Analyst Dan Fong looked at auto cycles for the last 40 years and found that whenever U.S. auto sales were in a recovery phase, the Big Three U.S. automakers (Ford Motor Co., General Motors Co. and Chrysler-maker Stellantis) produced an average 47% compound annual growth rate (CAGR), compared to 10% for North American stock indexes.
Meanwhile, global auto parts suppliers, such as Martinrea International Inc., Linamar Corp. and Magna International Inc., averaged a 40% CAGR.
“Right now, we’re in a heavy contraction,” Dan told Globe Advisor. In a recovery phase, “automotive stocks tend to outperform the broader market wildly.”
The analysis came from an industry report that Dan sent to clients on April 18, 2022: Canadian Autos: Riding the Cycle.
Bob Seeman is a Managing Partner with CyberCurb, a Senior Advisor at Endeavor, an author, attorney, electrical engineer & entrepreneur. He joined us on our Fact-Finding Video Conferences series with our clients, but we thought we would share this episode widely as cryptocurrencies experience extreme volatility.
Mr. Seeman is the author of multiple books on exposing Bitcoin (Bitcoin: The Coinmen; Bitcoin: Unlicensed Gambling; Bitcoin: The Mother of all Scams: Lies, manipulation and gambling; Bitcoin: The New Gambling Addiction), as well as another book: Ransomware Risk Mitigation for the Board (see his full bio).
Anthony and Mr. Seeman spoke about Bitcoin and its future, including:
• The linkage between cybercrimes and Bitcoin;
• Investment performance: "Bitcoin is gambling. It's not an investment. It's not even an asset. It has no cash flow or utility."
• Lack of regulation: "Major Bitcoin holders manipulate the market, not just on a daily or hourly basis, but on a microsecond basis. There is no disclosure."
• Fallacies of Bitcoin: "It doesn't meet any of the criteria of money."
• Correlation to the stock market: Is it digital gold?
• Supply of new Bitcoin into the market;
• Will any cryptocurrencies become fiat currencies?
• Financially illiterate retail traders buying on credit;
• How does this end?
At Veritas, we have been tracking pension deficits at companies in the S&P/TSX 60 since 2007. We have constantly warned that companies’ profitable income statements failed to reflect chronic pension underfunding.
However, as this article in The Globe & Mail lays out, things have turned on their head in the last two years.
In the aggregate, the pension plans of companies in the S&P/TSX 60 are in surplus now for the first time since we began tracking the data in 2007. Dimitry Khmelnitsky, our Head of Accounting and Special Situations Analyst, and associate Josh Sangha found that companies will get a benefit of nearly $44-billion in two years largely from rising interest rates, swinging from a $14.7-billion deficit at the end of 2020 to a projected $29-billion surplus at the end of this year.
Dimitry and Josh estimate a change of 0.25 of a percentage point in the discount rate used by a large Canadian corporation to calculate future liabilities has an impact 10 to 14 times larger than a 0.25 percentage-point change in investment return.
They calculated that a 0.25 percentage-point increase in the discount rate can increase the defined benefit pension surplus by $806-million at BCE Inc., $515-million at Canadian National Railway Co., $455 million at Canadian Pacific Railway Ltd., $450 million at Imperial Oil Ltd. and $407 million at Bank of Nova Scotia. Air Canada, which is not in the index, gets a $748-million benefit for each quarter-point rate rise.
The Globe article is based on our report that we sent to clients on March 29: Accounting Alert: Burden Relief: A Review Of S&P/TSX 60 Pension Plans.
Our Financial Services Analyst Nigel R. D'Souza was on BNN Bloomberg to explain why he thinks the increase in taxes for financial institutions unveiled in the federal budget is not justified.
"I can understand if there was a broad-based increase across industries to help with the fiscal picture. But to simply target the banks and insurers based on profitability in a highly abnormal environment driven by the pandemic, I don't think is appropriate."
The Liberal and NDP partnership means that the proposed surtax on profits for major Canadian financial institutions is a step closer to reality. The proposal taxes profits an extra 3% beyond $1 billion.
“It’s not something that’s going to impact the banks’ earnings growth or the return on equity materially going forward,” Veritas Financial Services Analyst Nigel D'Souza told BNN Bloomberg. “To me, the bigger concern isn’t this tax rate itself, but whether it sets a precedent for more onerous taxation on bank profits in the future.”
“The tax rate increase by itself, I don’t think is a sufficient enough reason to have a more bearish or concerned outlook for the banking sector,” he added.
Nigel made similar comments in The Financial Post about the same topic, adding that the tax could deter investments into the banking space with an implicit ceiling on bank profitability.
In this 11-minute video conference (above), Anthony Scilipoti, Veritas President and CEO, and Darryl McCoubrey, Head of Research and Head of our Investment Committee, discuss the performance and approach of our V-List model portfolio.
• What is the V-List? The process is a bottoms-up, equally-weighted model portfolio of 12-25 companies. Names must be large caps and liquid. The V-List is also sector agnostic and has low turnover.
• Performance: Our V-List model portfolio is up 3.06% year to date, versus the S&P/TSX Composite negative 0.12%, as of the end of February. Since its inception in 2004, the V-List has outperformed S&P/TSX Composite by 335 basis points annually.
• Defensive bias: “We’re favouring stocks with downside protection with catalysts to the upside,” Anthony said.
• Energy: Why the V-List went overweight energy and avoided technology in 2021. “If we don’t drill more, we’re going to have a lot more inflation. That’s clearly going to be a big issue given affordability constraints,” Darryl said.
• The War in Ukraine: How the spike in energy prices affects our outlook on the sector.
Find out more about our Track Record.
March 9, 2022
This dividend-growth story is also a debt-downgrade candidate
The Globe & Mail
Emera Inc has been raising its dividend for more than a decade and told Bay Street that it’s targeting 2% to 4% annual dividend growth through 2024.
But Veritas Investment Research analyst Darryl McCoubrey casts doubt on that outlook, as reported in this Globe & Mail article.
Darryl highlights recent company disclosure that says it has entered into derivative contracts that could require it to post hundreds of millions of dollars of collateral if the company’s credit rating ever slips below investment grade. Darryl also points out that the company’s debt metrics are widely offside investment-grade targets.
“It ultimately comes down to this,” Darryl said in the article. “If you’re willing to risk that there’s no consequence to Emera having non-investment-grade credit metrics, then its higher-than-average rate-based growth profile makes it an appealing income growth story.”
“The only reason I have a Sell [recommendation] on it is that it is not valued at a discount, and it has this risk,” he said. “I can probably get comparable returns on another utility like Hydro One and not have this … kind of clouded credit risk maybe you don’t need to take.”
The article includes comments from the debt rating agency and the company’s view.
Darryl reiterated his Sell recommendation in a report to clients on February 15, 2022: Q4-F21: Ominous Disclosure.
February 23, 2022
The Canadian banks will show softer earnings results this quarter
Nigel D'Souza, our Financial Services Analyst, joined BNN Bloomberg to discuss why he believes Canadian banks will show softer results in capital markets and wealth management divisions in Q1-F22. He also points out the possible risks ahead for the sector, which include increased interest rates.
"There is a balancing act between higher rates driving margin expansion and higher rates driving an increase in credit loss provisions," he said. "What really matters here is the pace and rate of interest rate normalization. If we get three or four rate hikes, that likely can translate into margin expansion without driving significant credit losses. But if we get a policy rate increase of 100 to 200 basis points in a relatively short period of time, let's say 12 to 18 months, then the benefits the banks will see to net interest income could be outweighed by concerns of rising credit losses."
The outlook for the Canadian banking sector is highly dependent on the outlook for interest rates, with the bond market pricing in at least six rate hikes in 2022, versus equity investors expecting less than four, he said. "Someone is wrong here."
"With inflation running at a 31-year high, expansionary GDP growth expectations and excess liquidity both on business and household balance sheets, I think it is a bit optimistic to expect less than four interest rate hikes by the Bank of Canada this year."
February 22, 2022
Analyst downgrades five of the Big 6 banks over worries risks of rate hikes will outweigh rewards
The Financial Post
The Financial Post also covered Nigel D'Souza, our Financial Services Analyst, downgrading five of the Big Six banks to Sell.
“While higher interest rates certainly benefit Canadian banks’ net interest margins, we expect market sentiment to shift over the coming months as investors look past the benefit of higher net interest income and look ahead to the possibility of slowing economic growth and elevated credit risk in a rising rate environment,” Nigel said in his report (published for clients on Feb. 9) that was quoted in the article.
Nigel told The Financial Post that a similar dynamic played out in 2017 when the previous rate hike cycle was underway. The price-to-earnings multiple peaked at 12.0x in early 2018 before hitting its bottom at 9.0x later in the year. Since the central bank took on a more hawkish tone late last year, Canadian banks have been rallying in a similar way, but Nigel expects that the sector will hit an inflection point where economic and credit risks outweigh benefits.
Bank of Montreal remains Nigel’s only Buy-rated bank of the Big Six.
February 9, 2022
Analyst cuts five of Big Six banks to sell on rate-hike fallout
Nigel D’Souza, our Financial Services Analyst, downgraded all but one of Canada’s Big Six banks, citing the eventual drag from higher interest rates, as covered in this article by BNN Bloomberg.
“We expect market sentiment to shift over the coming months as investors look past the benefit of higher net interest income and look ahead to the possibility of slowing economic growth and elevated credit risk in a rising rate environment,” he wrote in a report, that was quoted from in the article. He warned that history shows the banks could be heading for an “inflection point” after investors initially bid up their shares as central banks signalled the days of rock-bottom interest rates are coming to an end.
January 30, 2022
Why renewable energy stocks are tanking again, despite climate change fears
The Globe & Mail
Veritas Utilities and Infrastructure Analyst Darryl McCoubrey explained in this Globe & Mail article why many renewable energy stocks have fallen sharply in recent months. “There’s been a real change in how investors are perceiving these asset classes, because of inflation mostly,” he said. Renewable energy producers tend to have much higher debt levels than fossil fuel-fired generators and even oil producers, he said, prompting investors to consider how much it will cost these companies to borrow in a higher interest rate environment.
January 27, 2022
Fact-Finding Video Conference Series Episode 83
Tapping into the Instincts to be Healthier and Outperform With Dr. Stacy Irvine
Our Fact-Finding Video Conferences are for our clients, but from time to time we share one widely.
We would like to share Episode 83 with Dr. Stacy Irvine, who helped us understand why so many people have struggled with physical and mental health during the pandemic and what we can do to thrive and outperform as we emerge from lockdowns.
Dr. Irvine is the Founder and Co-Owner of Totum Life Science, a national leader in sports medicine with five locations in Toronto. Her formal education includes a degree in Kinesiology, a master’s degree in Exercise Physiology and a Doctorate of Chiropractic. She is also the author of Your Better Instincts: Uncover Your Inner Power to Improve Health, Happiness and Performance (see her full bio).
Anthony and Dr. Irvine discussed:
• What human instincts do we share that make it difficult to adapt to a pandemic?
• Why the quality of your relationships is more important than wealth in order to have good health.
• How to improve your good instincts.
• What are three things people could do now to improve their health and performance as we come out of the pandemic?
If you would like to hear more about Veritas, please sign up for our free News and Insights Newsletter.
Please feel free to share this video with anyone who you think might benefit.
January 26, 2022
Canadian banks stand to benefit once the BoC hikes interest rates
Nigel D’Souza, our Financial Services Analyst, joined BNN Bloomberg to discuss his reaction to the Bank of Canada keeping rates on hold at its January meeting this week.
Nigel noted he was surprised by the decision to hold rates steady, but expects hikes to begin in the coming months.
“The cover was there to hike the policy rate without surprising the market, and I’m not entirely sure why they didn’t take advantage of that opportunity,” he said. “Based on the Bank of Canada’s own research, they are well behind the curve in controlling inflation. I think we still have to have a pretty quick and accelerated normalization of rates.”
Nigel remains bullish on the bank sector because higher interest rates benefit the sector’s profit margins. “It is certainly a tailwind to the top line and bottom line.”
But at some point in a cycle of rising interest rates, concerns will shift to the pressure rising rates place on overleveraged consumers and businesses.
“If you look at the last hiking cycle by the BoC, which was in 2018 when it tried to normalize interest rates, the Canadian banking sector actually underperformed the broader market because the market and investors were concerned that rising debt service costs would translate into rising credit losses.”
January 24, 2022
Canada's housing market is betting interest rates will never rise
A Veritas survey was cited in this article by Bloomberg about Canada's housing market. The survey found about 40% of residential real estate investors were only breaking even in 2020 — making that group completely reliant on price appreciation to earn a return.
January 21, 2022
Fresh vs frozen: Circle K, On The Run parents face off in convenience store food fight
Two of Canada's largest convenience store operators have different strategies of enhancing food services after Parkland Corp. bought frozen food company M&M Food Market, explained this article by BNN Bloomberg.
Couche-Tard has already organically been rolling out its Fresh Foods Fast program (breakfast, hot sandwiches and burgers).
As fuel retailers adapt to the rise of electric vehicles, food services are becoming an increasingly important aspect of their business models as average customer dwell time - how long drivers spend at a refueling station - grows dramatically from just a few minutes for drivers of gasoline-powered vehicles to a minimum of 20 to 30 minutes for EV drivers, the article said.
“Hot food will also be an attraction as more customers charge their electric vehicles” at refueling stations, said Veritas Senior Consumer Staples & Consumer Discretionary Analyst Kathleen Wong, who covers Couche-Tard.
Food services also happen to have a “very high gross profit margin” of roughly 60 per cent, she added, “so we expect Couche-Tard to improve its merchandise [GPM] going forward.”
December 30, 2021
IASB’s Investor Update December 2021 Newsletter - Profile
December 20, 2021
Holiday Season Charity Drives
December 19, 2021
Bombardier shares drop as Swedish corruption probe unfolds
November 29, 2021
Preparing for Q4-F21 bank earnings
November 12, 2021
A Message from our CEO - Veritas 21st Anniversary
October 25, 2021
Focusing on the Essentials: V-List Overview Q3 2021
October 21, 2021
Emera not currently the best choice in utilities
October 8, 2021
How to play the new energy bull market
September 30, 2021
Canadian tech firm Lightspeed walloped by short-seller attack
June 29, 2021
Fact-Finding Video Conference Series Episode 71: Commercial Real Estate Market Re-Heating
With Alan MacKenzie, CEO JLL Canada
March 30, 2021
Fact-Finding Video Conference Series Episode 55:
Inside This Unstoppable Canadian Housing Market
With John Zinati, real estate lawyer at Zinati Kay
February 22, 2021
Canadian banks earnings preview
February 16, 2021
Shopify's Growth Path Is the Biggest Unknown As Valuation Soars
January 21, 2021
TC Energy could shrug off loss of Keystone XL pipeline project
January 10. 2021
Canadian clean energy would benefit from Keystone XL blocking
The leadership at Veritas takes an active role in representing investors to accounting and financial markets regulators. Anthony Scilipoti, Veritas President and CEO, is a member of the International Accounting Standards Board Capital Markets Advisory Committee and was profiled in the IASB’s Investor Update December 2021 Newsletter.
Anthony covered how Veritas was founded, what makes investing in Canada unique both from a sector mix and a financial reporting point of view, areas of corporate reporting that can be improved and what topics standard setters should focus on in coming years.
Here is part of his response to a question about how should standard setters should go about making changes for Canadian investors:
“Our clients tell us that they are not all too happy with the new IFRS Standards, like IFRS 9, IFRS 16, and IFRS 15. They tell us that this is too much change, too much complexity, and not enough comparability (both with US GAAP and across companies that report using IFRS Standards). These Standard changes have resulted in the loss of trend information, which is a critical input for investors. For example, I cannot compare the provisions for banks in the previous crises with those observed in this covid induced crisis. It is the same for revenues, which is literally the starting point of analysis for many investors. Not only have we lost trend information due to the new Standards; it has also become harder to understand the performance on long-term contracts.”
Veritas leadership has served in many roles representing investors over the years. Currently, Anthony has also served as a member of the Ontario Securities Commission’s Continuous Disclosure Advisory Committee since 2006, while Veritas Investment Research Analyst Howard Leung is currently a member of the Canadian Accounting Standards Board.
See the full article: Investor Update December 2021
Veritas staff and family proudly raised money for two charities during the holiday season.
First, We Are The Villagers is a charity in northern Ontario that provides funding to children of low-income families to participate in extra-curricular activities. Whether it be hockey, baseball, dance, piano lessons, art lessons, or more, WATV will cover the costs of fees and equipment. Please consider making a contribution.
Second, the staff at Veritas once again organized to provide meals and food for our local food banks to support those in need during the holiday season. All funds raised go directly to our shopping efforts to supply the foodbanks. Please consider offering your support.
Veritas staff and family supporting local food banks.
Veritas Industrials Analyst Dan Fong commented on issues weighing on Bombardier's stock in this Globe & Mail article.
“Although its shares are no stranger to volatility, the company has a history of unanticipated problems popping up to derail an otherwise positive outlook,” Dan said. “The recent drawdown has left us wondering if this might be a signal of history repeating.”
One worry among investors appeared to be that Bombardier is on the hook for several hefty contingent liabilities, including potential damages from a Swedish bribery case, Dan said. The concern is that these liabilities could represent a significant draw on cash and imperil the company’s turnaround.
His conclusion, published in a Nov. 19 research report to clients after he reviewed Bombardier’s accounting disclosures: The liabilities are manageable and do not represent a significant risk to the company’s comeback. He maintained his “buy” rating on the shares, with an intrinsic value estimate of $2.85 per share.
See the full article: Bombardier shares drop as Swedish corruption probe unfolds
Nigel D’Souza, our Financial Services Analyst, joined BNN Bloomberg’s Amanda Lang ahead of the Canadian banks releasing their Q4-F2021 results this week.
“Banks are currently trading at a premium to their historical valuations,” he said. “That is reasonable and warranted because current expectations are for an expansionary growth environment. But with the emergence of the new Covid-19 variant Omicron, there is potential that we could see a downward revision to economic growth expectations.”
That could hurt loan growth expectations and valuation multiples for the banks, he said.
Nigel also discussed dividend growth prospects, saying that National Bank and Bank of Montreal could increase their dividends by as much as 30% to 40%.
Bank of Nova Scotia has the lowest capacity, although it could increase its dividend by pushing its payout ratio up to 50%.
They also discussed the outlook for buybacks, capital markets and wealth management.
The most significant risk to banks is that the Bank of Canada will need to hike interest rates 100 to 200 basis points next year to rein in inflation. Higher interest rates, of course, lead to higher debt service costs and higher insolvencies. “I think that is the major risk. It is the pace and timing and speed of interest rate increases.”
We recently celebrated Veritas Investment Research's 21st anniversary as a firm. Over 21 years ago, we started with a plan to just “tell the truth.” There was so much doubt about our vision because equity research was perceived to be free.
One thing is certain; we’ve never stopped learning. We have proven that high-quality, independent research is key to making sound investment decisions. I believed it then and believe it even more so now.
What we’ve built is an organization and culture focused on helping our clients make better investments. Whether that is through our research, our training, our portfolios, or taking an active role in representing Canadian investors on accounting or regulatory boards, we want to be a source of great ideas, sober second thoughts, and the truth behind what is in the numbers. None of this would have been possible without all of you who believed in us along the way. We have so many people to thank in our journey. I’d like to express deep gratitude on behalf of my 15 partners.
— Anthony Scilipoti, President and CEO
PS We weren't able to get together in person this year, so this picture is from a company celebration in 2018 with Michelle Mercer (middle), our Corporate Secretary & Client Relationship Manager who was one of the company's original founders, Dimitry Khmelnitsky (right), our Head of Accounting who has been with Veritas for more than 15 years, and myself (left).
Nigel D’Souza, our Financial Services Analyst, joined BNN Bloomberg’s Amanda Lang to discuss why he believes the Office of the Superintendent of Financial Institutions will allow Canadian banks to hike dividends and pursue share buybacks once more.
“I think it is highly likely that OSFI announces a lifting of the capital restrictions that were rolled out at the start of the pandemic,” Nigel said. “I expect OSFI to announce that banks can pursue dividend increases and share buybacks.
“It is a prudent decision in an environment where pandemic-related risks are subsiding, and when you look at the balance sheets for the banks, they are all extremely well-capitalized.”
To understand the capacity for dividend increases, investors need to look at earnings for 2022 because dividends are paid out of earnings, not capital. National Bank has the highest capacity and could increase its dividend by 30% or more, while Bank of Nova Scotia doesn’t have any capacity to increase its dividend. “That could potentially disappoint investors.”
He said that the remainder of the Big Six banks could increase dividends by 10% to 20%.
Meanwhile, Bank of Montreal, Royal Bank and Toronto Dominion Bank have the highest capacity for buybacks, while the other three are more limited.
Nigel also discussed what the market is pricing in for dividend increases and buybacks and what higher interest rates could mean for the banks.
Nigel was also quoted in this article by The Canadian Press about the same topic: Banking regulator lifts restrictions on dividend raises, share buybacks
October 28, 2021
Professional Accounting Centre 2021 Annual Conference on Professional Accounting Futures
Veritas President and CEO Anthony Scilipoti presented at this annual conference, providing real-company examples of both transparent and obfuscating accounting. He told the attendees that he was concerned that COVID was an excuse for some companies to make their numbers look better than they might otherwise be.
“When we see sneaky accounting, that's kind of our first sniff test to say maybe there's something unsustainable in the underlying operations,” he said. “The best type of disclosure is just full disclosure: explain how you make the adjustments, explain why you make the adjustments, and we'll decide as investors whether we want to include them in our calculations or not.”
We’re very proud of the performance of our V-List model portfolio, which now has a 17-year track record.
In this 11-minute video, Anthony Scilipoti, Veritas President and CEO, and Darryl McCoubrey, our Head of Research and Head of our Investment Committee, discussed our approach for picking stocks for the V-List and the performance through the first three quarters of the year.
• Performance: Since its inception in 2004, the V-List has outperformed S&P/TSX Composite by 314 basis points annually (as of the end of September). It is also outperforming this year.
• The process: It is a bottoms-up, equally-weighted portfolio. Names must be larger cap and liquid. The V-List is also sector agnostic and has low turnover. “Our level is diligence is deeper,” Anthony said. “Our analysts cover fewer names, and they spend more time looking at the details associated with those names.”
• Focusing on cash-based returns: We focus on actual cash-based returns instead of longer-term growth stories dependent on low-cost equity funding. Our Buys have outperformed the S&P/TSX Composite by 377 basis points over the past 20 years, while our Sells have underperformed by 446 basis points.
• Inflation: Our current strategy focuses on companies that provide essential goods and services. “It is important we focus on essential things: real estate, energy, food. These are the kinds of things that can pass along inflation and safeguard our returns,” Darryl said. Specifically, we increased our allocation to traditional energy while avoiding renewable energy due to its premium valuations.
Find out more about our Track Record.
Veritas Special Situations Analyst Dimitry Khmelnitsky commented on the company's $370-million lawsuit versus the Canadian government, noting that the lawsuit is another indication that SNC’s decision in 2019 to exit fixed-price construction was the right one.
Given the fixed price nature of the contract that transferred the risks to SNC and its partners, it appears highly unlikely the consortium will be awarded the entire $370-million, Dimitry said. Still, some recovery is in the cards given the force-majeure type of events that affected the project.
See the full article: SNC-Lavalin suing government for damages over Montreal’s Champlain Bridge project
Veritas is the only firm with a Sell rating on Emera. Darryl McCoubrey, VP of Utilities and Infrastructure at Veritas, joined BNN Bloomberg to discuss why he is wary of the stock.
Darryl made it clear that Emera's dividend is not at risk. But by his calculations, the stock trades at a premium to its peers while it has lower cash flows and a lower credit rating. This will lead to lower dividend growth.
Darryl also discussed Fortis and why Hydro One is his Top Pick. He also touched on Canadian Utilities Ltd. as a value play and how inflation impacts the Utilities sector.
Watch the replay: Emera not currently the best choice in utilities
Darryl was also quoted in the The Globe & Mail about why he is the lone analyst with a Sell recommendation on Emera: A buy-and-hold utility with a growing dividend
Jeffrey Craig, Veritas Energy Analyst, was quoted in this Globe and Mail article about how to play the surge in energy prices.
Oil companies are not developing new projects due to a lack of increased pipeline capacity and lack of financing from banks and investors, which means that management teams now are “forced to return capital to shareholders” after paying down debt, Jeff said.
Canadian Natural Resources, Cenovus Energy, Suncor Energy and Imperial Oil will have strong balance sheets by year-end. “You could see some serious dividend increases and a lot of share buybacks,” he said.
“I have been bullish on natural gas for a while, and it’s up a lot more than oil this year, so my bullishness has played out in the current prices,” he added. “From here, I see more upside in oil stocks.”
See the full article: How to play the new energy bull market
This CBC article described how Lightspeed POS’s stock fell after a short-seller, Spruce Point Capital, published a short report about it.
Veritas Analyst Howard Leung’s long-term opinion on the stock is summed up in the article, as it quotes his recent research report.
“Overall, while we have issues with management’s [accounting], we continue to believe the business can still exceed short-term guidance given reopening trends and the company’s growing scale,” he said. “Investor doubts persist around [Lightspeed] because management is not providing enough high-quality disclosure.”
Howard had a valuation of $96 on Lightspeed’s shares, which was about $30 below where they were at the time of the article. “The industry is too competitive to justify [Lightspeed’s] current valuation,” he said.
See the full article: Canadian tech firm Lightspeed walloped by a short-seller attack
Veritas's research about Lightspeed's disclosure and growth prospects was also referred to in this piece by Globe & Mail columnist David Milstead a few days after the CBC article above: Shareholders should look to lock in gains on Lightspeed shares amid competitive pressures
September 25, 2021
The death of profit: Why investing feels broken, and markets no longer make sense
In this feature, Globe & Mail writer Tim Kiladze described how investors are throwing vast amounts of cash at money-losing companies in the hopes of finding the next Amazon.
The article covered several of the companies we follow at Veritas that are serial acquirers. On the good side are the serial acquirers like Alimentation Couche-Tard and Constellation Software, which show cost discipline, synergies, and free cash flow growth.
On the other side are the serial acquirers like GLF Environmental and Lightspeed POS Inc., which seem focused on showing as much growth as fast as possible.
At Veritas, we think the companies that show free cash flow growth will win out in the end over the high-growth rapid acquirers.
“At some point, the fundamentals matter,” Howard said in the article.
See the full article: The death of profit: Why investing feels broken, and markets no longer make sense
Nigel D’Souza, our Financial Services Analyst, was a guest on BNN Bloomberg with Greg Bonnell, discussing his view of the Liberal government’s minority victory and how its proposed tax hikes on banks and insurers will impact the financial sector and shareholders.
“My concern is whether or not this policy measure leads to more oversight or regulation and potentially more taxation for the [banks],” Nigel said. “If the government starts focusing on profit centres or revenue drivers for the banks, such as with banking fees, that could be a multi-year headwind. Hopefully, we don’t see that happening, but so far, there are few details to go on.”
Nigel also discussed his outlook for the banks.
“I think the sector is going to see a couple of headwinds and tailwinds,” he said. “You’re probably going to see benefits from rising interest rates, margin expansion and a recovery in banking fees. But those will be partially offset by higher credit losses after reversals flow through, as well as higher expenses as we get back to a normal cost structure in a post-pandemic world. In total, I think you’re going to see low single-digit earnings growth for the sector.”
Srivatsan Prakash, a recent high school graduate in Toronto and aspiring money manager, started a podcast two years ago called Market Champions. More than 175 episodes later, and after passing 20,000 followers on Apple Podcasts, Anthony Scilipoti, Veritas President and CEO, was his guest. They discussed:
• How Veritas started more than 20 years ago and some of its more successful calls, such as on Nortel Networks;
• Different ways companies can cook the books, the dangers of non-GAAP accounting and weaknesses in Canada’s regulatory environment;
• The difference between a Sell recommendation and a short, as well as Veritas’s approach for evaluating stocks;
• Where investors need to tread carefully in today’s market and areas of opportunity for fundamental long-term investors.
Listen to the podcast:
• iTunes/Apple Podcast
Nigel D'Souza, Veritas Financial Services Analyst, joined BNN Bloomberg to discuss his look-ahead for Canadian bank earnings.
"Heading into the quarter, there are some headwinds and tailwinds that we expect. For tailwinds, we think you're going to see continued strength in Canadian banking. Canadian banking has fared really well during the pandemic," he said. There also are tailwinds for capital markets and wealth management. The headwinds are outside of Canada in international banking.
Watch the replay: Canadian banks will have to navigate the impact of the Delta variant
In this 8-minute video, Anthony Scilipoti, Veritas Investment Research President and CEO, and Darryl McCoubrey, Veritas Head of Research and Utilities & Infrastructure Analyst, reflect on our V-List performance in the first half of 2021.
The V-List had outperformed the S&P/TSX Composite Index as of the end of July in this video (and it had maintained its outperformance at the end of August as well). They discussed:
• Our process for choosing companies for the V-List: It is a bottoms-up, equally-weighted model portfolio of 12-25 companies. Names must be large caps and liquid. The V-List is also sector agnostic and has low turnover. “We predominantly focus on cash flows,” Darryl said. “If we don’t see a cash-flow-based return that we find appealing compared to the risk we’ve assessed for the company, we won’t add it to the list.”
• Accounting: “We dig deeper into the accounting to make sure that we’re not being misled [in evaluating cash flows],” Darryl said.
• Conservative discipline: The V-List has outperformed the S&P/TSX Composite in 15 of the past 17 calendar years. The two years when the V-List did not outperform were 2009 and 2020, both bounce-back years from market crashes. “Our conservative, careful process leads us to not jump before waiting to ensure the fundamentals are matching the move in the stocks,” Anthony said. “In both of those years, the stocks ran ahead of what the fundamentals were telling us.”
Find out more about our Track Record.
Veritas Senior Retail Analyst Kathleen Wong thinks quick-service restaurants are the best way to play restaurant stocks as economies re-open from lockdowns.
Many consumers remain hesitant about indoor dining, and it could take more time for those restaurant companies to see their revenues rebound from the pandemic setbacks, she told The Globe and Mail.
She has a Buy on Restaurant Brands International, owner of Tim Hortons, Burger King and Popeyes Louisiana Kitchen. She points to its expanding drive-through, delivery and digital services as competitive advantages for hungry customers seeking a more seamless ordering experience.
See the full article: Canadian restaurant stocks rebound from COVID-19 pandemic, but concerns linger
Veritas Financial Services Analyst Nigel D'Souza appeared on BNN Bloomberg to discuss his latest report on the Canadian banks.
“We think the market is no longer going to reward banks that do well on earnings based on temporary pandemic-related factors such as record or elevated capital market revenues and significant credit loss reversals,” he said.
“If you look at U.S. bank results, which reported recently, you can see that their earnings were fairly strong on those temporary factors, like higher capital markets revenue and [provisions for credit losses] reversals. But their core banking business didn’t do as well, and you saw weaker loan growth,” he said. “And the market didn’t respond positively to the results despite the top-line number being good.”
“We think the market is going to pivot and look ahead to post-pandemic earnings in a more normalized environment.”
Nigel’s only Buy-rated bank is TD. “All the factors and trends that hurt TD during the pandemic are going to be what provides a tailwind for TD coming out of the pandemic,” he said.
“When we have net interest margins beginning to expand again as central banks normalize interest rates, when we have loan growth returning to normal as excess cash balances are depleted and when we have capital markets revenue normalize, all of those factors benefit a bank like TD Bank.”
Nigel also discusses the outlook for dividend increases.
Watch the replay: Investors unlikely to reward pandemic-boosted Canadian bank results
July 14, 2021
Oilsands assets worth $13.4 billion may be up for grabs with Big Oil on divestment spree
Canadian oilsands assets with a potential price tag of $13.4 billion may be up for sale as oil majors divest their heavy oil assets in Western Canada, according to a report from our Veritas Energy Analyst Jeff Craig, as quoted in The Financial Post.
“Given the pressure to both cut emissions and invest in renewable energy, we expect the super majors to shed mostly upstream oil and gas assets to fund investments into renewables,” Jeff said in a report title Climate Policy Creates a Buyers’ Market (initially written for clients on June 14).
The likely candidates to buy these assets are what Jeff calls Canada’s “Final Four” — Canadian Natural Resources Ltd., Suncor Energy Inc., Cenovus Energy Inc. and Imperial Oil Ltd. — given the exodus of major international oil players over the years and the consolidation within the industry. Along with MEG Energy Inc., the group accounts for 90% of Canada’s oilsands production.
“We expect Canada’s oilsands asset to be the first to come to market,” he said. “A poor reputation for oilsands internationally suggests the only logical buyers would be Canada’s Final Four operators.”
See the full article: Oilsands assets worth $13.4 billion may be up for grabs with Big Oil on divestment spree
July 3, 2021
With limitations of remote work becoming more evident, REITs will be among biggest beneficiaries
As lockdowns ease and people return to offices, Veritas Real Estate Analyst Howard Leung provided his take on how this will affect office REITs.
“There is no consensus on how far the return to the office will go,” Howard told The Globe and Mail in an article by Ian McGugan. “But there is a growing belief that some sort of hybrid model will become common, where people work from home part of the week and go into the office for the remainder.”
Even the tech giants that paid the most enthusiastic lip service to the possibilities of remote work last summer have not abandoned the office, he said. He recently compared lease commitments by the likes of Twitter Inc., Amazon.com Inc. and Shopify Inc. and found they ticked up in 2020 compared with a year earlier. While not all of these lease commitments were necessarily for office space, the lack of any dramatic reduction in commitments suggests that even companies well-positioned to work remotely are not shedding vast acres of empty cubicles.
Howard said he was “bullish” on Allied Properties. He put its intrinsic value at $50 a share (as of his most-recent report dated April 30, 2021), significantly higher than the $44.65 level around which it was trading.
He also was optimistic about RioCan REIT, as a result of the stabilizing outlook for commercial real estate in general – and, more specifically, RioCan’s plans to add residential units on top of many of its urban retail properties. He had an intrinsic value estimate of $23.50 on the shares (as of his most-recent report dated May 5, 2021). They were trading around $22 at the time of the article.
June 29, 2021
Fact-Finding Video Conference Series Episode 71:
Commercial Real Estate Market Re-Heating
Alan MacKenzie, CEO JLL Canada
Occasionally, we make some of our video conferences freely available. This one was with Alan MacKenzie, CEO of JLL Canada, which is part of a global commercial real estate services firm. Our conversation with him was part of our Fact-Finding Series, in which we go “on the ground” to speak to industry professionals to find the truth about how the pandemic will affect the future of our economy, our lives, and our investments.
Anthony and Mr. MacKenzie discussed:
• Commercial real estate industry conditions before the pandemic: There was too much capital chasing too few income streams across all asset classes before the pandemic, so institutions were getting into development.
• Booming demand for industrial because of eCommerce fulfillment: Vacancy rates in the Toronto area were 1% before the pandemic and may go as low as 0.1%, despite adding millions of more square feet of space.
• Multi-family market and immigration: “Investors in this market are trying to buy up that product as fast as they possibly can.”
• Retail: Market activity has picked back up over the last 30 days, with cap rates lower than pre-pandemic, despite so many retail locations being recently closed. Who is selling, who is buying, and why?
• Office transactions: This market is bouncing back as well, as sellers are not waiting until full re-opening to bring properties to the market because they believe there is already enough dry powder out there to drive competitive bidding.
• Office tenants: Why vacancy rates are artificially high and will fall. Advice for the return to work, including hybrid and hub-and-spoke models.
• Where are the best opportunities in the sector? For entrepreneurs, the best spreads and value is in Alberta retail. For institutions, the best opportunities are in developing industrial properties and multi-family.
Subscriptions to our Fact Finders are available: Find out more
June 16, 2021
Anthony Scilipoti appointed to OSC Continuous Disclosure Advisory Committee for Another Two-Year Term
We are proud to share that Veritas President and CEO Anthony Scilipoti, will serve another two years on the Ontario Securities Commission (OSC) Continuous Disclosure Advisory Committee (CDAC).
The CDAC advises the OSC on the planning, implementation, and communication of its continuous disclosure review program and policy. Anthony has served on the committee since 2006.
Through our 20-year history, we at Veritas have been steadfast in our commitment to advising regulators on how to make disclosure and accounting better for investors. Anthony is also currently on the Board of the Capital Markets Advisory Committee of the International Accounting Standards Board, while Analyst Howard Leung serves on the Canadian Accounting Standards Board.
Anthony is also a former member of the Canadian Accounting Standards Board, the Canadian Institute of Chartered Accountant’s Emerging Issues Committee, and was the Chair of Chartered Professional Accountants of Canada Users Advisory Committee.
See the press release: OSC Announces Continuous Disclosure Advisory Committee Members
June 11, 2021
Canadian auto parts makers give investors a chance to bet on North America’s economic reopening
Veritas Industrial Analyst Dan Fong provided his outlook on Canadian auto parts companies in an article by Ian McGugan in The Globe & Mail.
“There is a very positive set of factors driving the outlook for the auto sector right now,” he said in an interview. “And the Canadian auto parts suppliers seem particularly well-positioned to take advantage of the opportunity.”
He said demand for new cars reflects three factors: used-car prices, credit availability and consumer confidence. All three of these fundamentals are now pointing upward. Strong used-car prices ensure that buyers benefit from strong trade-in value. Credit availability is ample. And consumer confidence is trending upward as economies reopen.
“This doesn’t necessarily mean that we’re going to hit a record 18 million vehicles sold in the U.S., but it does mean we’re not going to go back to pandemic rates of only 13 or 14 million a year,” Dan said.
Investors also shouldn’t be worried that the shift to electric vehicles will bypass traditional auto parts suppliers.
For one thing, even the most optimistic forecasts for electric-vehicle adoption indicate that gas-powered cars will continue to represent the majority of new vehicle sales in the U.S. over the next 15 years.
And even with the rise of electric vehicles, about 70% of a car’s parts remain the same whether it uses an internal combustion engine or an electric motor, Dan said. “There will still be ample opportunities for traditional auto suppliers,” he said.
As written in a report to our clients on May 7, he has a target price of US$106 on Magna (now trading around US$99), $100 on Linamar (now around $83) and $19 on Martinrea (now around $13.60). He rates all three a BUY.
Dimitry Khmelnitsky, Veritas Vice President and Head of Accounting & Special Situations, was ranked #3 Special Situations Analyst in Canada in 2020 by institutional investors according to the Brendan Wood TopGun Awards.
He was voted #1 in 2019 and #3 in 2018.
Our analysts have won numerous awards over the years, including 27 Refinitiv StarMine Awards for generating excess returns for our clients.
The Canadian Securities Administrators will issue new rules on how companies can use non-GAAP financial metrics, as reported in The Globe and Mail.
The CSA previously had guidelines for the use of non-GAAP numbers, which companies could choose to follow. The guidelines are now formal regulations.
“I’m impressed that [the new regulations have] more teeth than even the U.S. regulations,” said Veritas President and CEO Anthony Scilipoti, in the article. “And I’m impressed that [the CSA] didn’t back down [to critical feedback].”
As the article said, the non-GAAP conversation got louder in Canada in September 2016, when The Globe and Mail published the results of a report by Veritas Investment Research. We at Veritas found 70% of the members of the S&P/TSX 60 stock index of large public companies used some form of “non-GAAP” metric in their results – and many seemed to be violating regulatory guidance on how to report them.
Read the full article: Regulators now equipped to crack down on misleading financial metrics
Veritas Financial Services Analyst Nigel D’Souza appeared on BNN Bloomberg with Amanda Lang to discuss the upcoming quarter for the Big Six Canadian banks.
“I think you’re going to see strong results across the Big Six banks this quarter,” he said. “I expect them to surprise to the upside on earnings estimates.”
Two key factors will drive the quarter. First, the banks will begin to reverse substantial loan loss reserves they built up during the pandemic. Second, their capital markets and wealth management groups will likely report a banner quarter.
“I think banks are operating in an ideal environment. It’s an environment of minimal credit risk and very robust financial markets,” Nigel said. The beginning of the pandemic was marked by high unemployment and restrictions on businesses. Typically, those would have resulted in higher insolvencies and loan impairments, however, government stimulus and deferral programs have broken the link between the economy and credit risk.
Watch the replay: Canadian banks likely to release reverses set aside from the pandemic
May 14, 2021
CN and CP are offering enormous sums for Kansas City Southern, but history suggests the payback will be robust
With the bidding war for Kansas City Southern heating up between Canadian Pacific Railway Ltd. and Canadian National Railway Co., Veritas Industrial Analyst Dan Fong weighed in on what investors should do in an article in The Globe & Mail.
CN’s offer values Kansas City Southern at 36 times forecasted earnings, which is more than what Facebook and Apple trade for.
While it might seem ridiculous to put a higher valuation on a century-old railway operator than a fast-growing tech giant, the winner of the bid would be the first railway to seamlessly connect Canada, the U.S. and Mexico.
The winner will also be able to wring considerable cost savings and new revenue opportunities out of a merger.
CP – which has currently made an offer below CNR but has five days to decide whether to raise it – said the merger would generate US$780-million in added EBITDA (earnings before interest, taxes, depreciation and amortization).
Dan said he has confidence in CP’s ability to achieve the EBITDA gains it has outlined if its bid does win approval. “Management has a track record of delivering on its promises,” he said in an interview. “If anything, I think the [US]$780-million estimate is probably low.”
As the North American economy reopens and rebounds, Dan said both Canadian railways are trading below their intrinsic value, even ignoring any potential benefits from a Kansas City Southern acquisition.
Veritas Financial Services Analyst Nigel D’Souza outlined the tailwinds he sees for Home Capital Group’s outlook in this Globe & Mail article.
“Despite a lack of diversification, we see several tailwinds for adjusted earnings in FY21 [full-year 2021], including deposits repricing at lower yields, reversals of credit allowances, and elevated real estate market activity,” Nigel said.
See the full article: What to expect from Home Capital Group earnings on Thursday
May 11, 2021
Flexible reporting standards mean investors know little about when companies used emergency wage subsidies
Veritas President and CEO Anthony Scilipoti discussed with The Globe & Mail how many companies are not accounting for millions of dollars of Canada’s Emergency Wage Subsidies in their financial statements.
At the same time, other companies are disclosing subsidies in different ways, leaving investors to struggle to understand just how much government largesse has propped up corporate profits.
“It obscures the performance and the ability to evaluate the performance trend of the underlying business,” said Anthony. “I have no opinion about whether they [should have] got the government grant – it’s a whole other argument. Once they got the credit, what should they be doing and others be doing to help the users of the financial statements understand what’s going on with the business?”
Power producers and utilities have mechanisms in place to protect their revenues against inflation, Veritas Head of Research Darryl McCoubrey told The Globe & Mail in this article.
“There is no question regulated utilities and contracted independent power producers have less inflation risk than uncontracted, or merchant, enterprises,” Darryl said.
See the full article: How dividend stocks can protect you from inflation
May 3, 2021
Bombardier disputes unnamed bondholder’s claims it breached pledges over sale of train unit
Veritas Industrials Analyst Dan Fong provided his take on Bombardier’s news that it has approached bondholders seeking to change the terms of their debt after an unnamed investor claimed recent asset divestitures breached covenants.
“I think it’s a shakedown” by an opportunistic investor that appears to be angling for a payout, Dan said in The Globe and Mail. The allegations “cloud Bombardier’s turnaround plans,” but the issue appears solvable at a reasonable cost, he said.
The cost to the company for the consent fees would be about US$10-million, Dan estimated, a “low price to pay” to resolve the issue. A worst-case scenario is unlikely because most bondholders have little incentive to push the company into default, he said.
See the full article: Bombardier disputes unnamed bondholder’s claims it breached pledges over sale of train unit
Soaring real estate prices leave Canada’s economy too dependent on the housing sector, Veritas President and CEO Anthony Scilipoti told The Globe & Mail in this weekend feature.
Residential investment has swelled to make up more than 9% of economic output, the highest level on record, he said. Home prices are rising far faster than fundamental factors, such as incomes or rents.
“It’s not good for the country,” Anthony said.
However, there isn’t an obvious catalyst for the market to correct given that households have accumulated more than $148 billion in savings since the start of the pandemic and are pouring a good part of it into real estate, he said.
See the full article: The trouble with ‘bubble’: Why Canada’s red-hot housing market is defying the burst
This free 10-minute video provided a high-level overview of a report that took months to write.
The original report by our Special Situations team covered the companies Sunrun Inc. (RUN), Sunnova Energy International Inc. (NOVA) and SunPower Corporation (SPWR). The report revealed that common non-GAAP metrics used by the residential solar industry could be overstated by 20%-70% (the report is only available for clients).
The video below is a brief overview, but we also held an in-depth 90-minute teach-in webinar that walked our clients step-by-step through the industry’s non-GAAP complexities. Our clients left with a greater appreciation of the risks in relying on company calculations and tools to create their own valuation frameworks.
The report’s lead author, our Head of Accounting Dimitry Khmelnitsky, called the industry's non-GAAP metrics the most complicated he has seen in his 15-year career at Veritas.
For subscription options or to purchase the report, please contact Sales.
At Veritas, we make it a priority to be a voice for investors on regulatory boards. Analyst Howard Leung was appointed to be a member of the Canadian Accounting Standards Board to do just that. The AcSB is an independent body that establishes standards for financial reporting for all Canadian private sector entities and contributes to internationally accepted financial reporting standards.
Elsewhere, Veritas President and CEO Anthony Scilipoti was appointed to the Board of the Capital Markets Advisory Committee of the International Accounting Standards Board in 2019. He also s,currently erves on the Ontario Securities Commission's Continuous Disclosure Advisory Committee.
See the press release: Accounting Standards Oversight Council Appointments and Retirements
March 30, 2021
Fact-Finding Video Conference Series Episode 55:
Inside This Unstoppable Canadian Housing Market with John Zinati, real estate lawyer at Zinati Kay
From time to time, we make some of our video conferences freely available to our followers. Our 55th episode of the Fact-Finding Series was with John Zinati, a veteran Toronto real-estate lawyer at Zinati Kay. With more than 23,000 real estate transactions completed, Mr. Zinati has a unique perspective on the housing market with a view into buyers, sellers, and financing.
Veritas President and CEO Anthony Scilipoti and Mr. Zinati discussed:
• What is the mentality of buyers/sellers/financiers in today’s market?
• How does the past year compare with the previous 35?
• Where is the financing coming from now, and how has that changed from previous years?
• The condo market softened in 2020, while detached housing skyrocketed. What is happening now?
• What key metrics are you watching to monitor the health of the housing market?
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Veritas Financial Services Analyst Nigel D’Souza was a guest on BNN Bloomberg to discuss the hot housing market, which some analysts are calling a bubble.
For Nigel, the housing market can be looked at through a supply/demand lens. It’s a highly illiquid market, with less than 3% of the housing stock changing hands each year.
When you look back at the pandemic, marginal demand increased while marginal supply decreased, which caused prices to rise substantially. Low interest rates have spurred demand, but so has lower household spending.
Nigel calculates that households are spending about $800 per month less during lockdowns and one place they’re putting those excess savings is towards higher mortgage payments.
Every $100 per month extra that a consumer puts towards a mortgage gives them about $25,000 more in spending power at current mortgage rates of about 2%, he calculates.
The Central Bank has indicated it will not raise interest rates any time soon, so higher interest rates probably won’t discourage demand substantially in the near term. Meantime, ongoing government support programs mean people are not being forced to sell their houses.
“We probably won’t see a risk of substantial supply hitting the market until later this summer or maybe in the fall,” he said. “And on the demand side, I don’t see demand declining significantly until after the pandemic ends and interest rates move up. In the near term, I don’t think a real estate price decline is a significant risk.”
Watch the replay: Household savings is fuelling the demand side of Canada’s housing market
Veritas President and CEO Anthony Scilipoti told the CBC that a lot of the Special Purpose Acquisition Companies, or SPACs, coming to market today "will end in tears."
SPACs have been around for a while, but have become overhyped during the pandemic, partly because there is a lot of stimulus money floating around the markets, looking for a place to go. "People have short memories," he said.
See the full article: SPAC'd out: Everything you need to know about the next hyped-up investment fad
The Canadian Big Six banks’ capital market segments are set to drive earnings when banks report Q1-F21 results this week, Veritas Analyst Nigel D’Souza told BNN Bloomberg.
“I think the banks are going to reflect the disconnect we’re seeing between the economy and the broader markets,” he said. “Given the robust financial market conditions, we think that capital markets segments are going to perform really well this quarter along with wealth management.”
That means investors should be overweight National Bank and Royal Bank as they have the highest exposures to financial markets. The other banks are more tied to personal and commercial lending and, therefore, weakness in the underlying economy.
With Shopify Inc. set to report its Q4 results, Veritas Analyst Chris Silvestre was quoted in several news outlets about the company’s growth prospects in 2021 and beyond.
Veritas was one of only two firms with Sell recommendations on Shopify at the time, according to Bloomberg.
“The recent pace of growth is unsustainable, and it’s unclear whether investors are prepared for a material deceleration in gross merchandise volume and revenue growth,” Chris said in an article by Bloomberg (the article quotes a recent research note he wrote). “We believe that the company’s growth will slow materially in mid-2021, disappointing investors and causing share price declines or stagnation.”
The Globe & Mail also quoted Chris’s research in a Report on Business feature titled: CEO Tobi Lutke looks to change ‘everything’ about eCommerce platform. Shopify is “so large that sustaining the recent pace of penetration gains in the U.S. is unlikely,” Chris said.
Maclean’s also recently ran a feature about Shopify’s CEO Tobias Lütke, ranking him as the second-most powerful Canadian behind the Prime Minister. “Shopify is a phenomenal company at the right price,” Chris said. “But it’s so hard to wrap your head around the valuation.”
Veritas Analyst Howard Leung was interviewed by Ian McGugan in The Globe & Mail about the outlook for REITs.
“There has been a huge divergence between different types of REITs,” Howard said. “Basically, anything that requires people to gather together – offices, seniors’ housing, retail – has been under pressure since the pandemic began.”
In the article, Howard discussed his Top Pick, which is industrial property-owner Granite REIT. “You get the best of both worlds,” he said. If lockdowns persist longer than expected, Granite is well-positioned to cater to the distribution needs of e-commerce companies. On the other hand, if lockdowns end and economies boom, the REIT should benefit from the recovery. Howard has an $85 target price on Granite, which is now trading around $76.
Howard also explained why the outlook for retail landlords isn’t quite as bleak as many people think.
See the full article: Beaten-down REITs could see negative sentiment reverse quickly as lockdowns end
The potential cancellation of the Keystone XL oil pipeline project after U.S. President Joe Biden rescinded a key permit would not necessarily dampen TC Energy Corp.'s appeal to investors.
Even though Veritas's Utilities and Infrastructure Analyst Darryl McCoubrey estimated TC Energy will record an impairment charge of at least C$1.00 per share, he told S&P Global Intelligence that the company's natural gas and nuclear segments, which account for approximately 90% of its portfolio, stand to benefit enormously.
"A loss in its oil business indirectly enhances opportunity in its other, much more important operations," he said in an interview. "I don't get why it's all doom and gloom. I get that the Keystone XL windfall would have been huge — my estimate is you could've added C$10 per share maybe had it gone forward ... but that decision in itself doesn't ruin TC Energy's appeal."
See the full article: TC Energy could shrug off loss of Keystone XL pipeline project
CPA Ontario issued a report about ESG's impact on accounting.
“ESG measurement is in the eye of the beholder, with too little emphasis on how it is being calculated… Just because a company has high or low ESG scores doesn’t mean it’s a good investment,” Anthony said.
See the full report: CPAs and the New Social Contract: The Rise of the Warrior Accountant
Veritas Head of Research Darryl McCoubrey appeared on BNN Bloomberg to discuss the implications for pipelines and energy producers if President-elect Joe Biden blocks TransCanada’s Keystone XL pipeline as was rumored at the time.
“The potential value that Keystone XL could have represented to TransCanada shareholders is about $10 per share,” he said. “With the stock trading in the mid $50s, it is a very material asset. We didn’t expect Keystone XL to ever go forward. It’s not just the political opposition, which is strong. It is also the realistic outlook for oil from Canada. Keystone XL alone is essentially the same capacity as Line 3 replacement and TransMountain expansion combined. We probably didn’t need that much expansion.”
Darryl also discussed his outlook for Canadian pipelines and the energy sector. “I don’t expect there to be a mass contraction within the Alberta oil industry over the long term. Our marginal cost of production is competitive with the world.”
See the replay: Canadian clean energy would benefit from Keystone XL blocking
Consolidation in the energy industry is expected to be a continuing trend, according to Veritas Energy Analyst Jeffrey Craig in this article by BNN Bloomberg. He said the layoffs stemming from mergers will lead to more office vacancies down the road, pointing to the cost-cutting measures following Cenovus Energy Inc.’s takeover of Husky Energy Inc.
“They say synergies are $600 million, and $500 million of that will be… largely in salaries and probably leasing that's coming out of the business and is unlikely to come back,” Jeff said.
See the full article: Pandemic, oil downturn hitting Calgary's office real estate with one-two punch
Veritas Head of Research, Darryl McCoubrey, was quoted by the CBC in this article about markets reacting to the Democratic “blue wave” this week.
President-elect Joe Biden vowed his administration will remove carbon pollution from the U.S. electricity system by 2035. Several renewable power companies in Canada already have a presence in the U.S., including Brookfield Renewable Partners, Algonquin Power and Utilities, and TransAlta Renewables.
“Electricity demand is going to go up as more electric vehicles are being used [and we see] the electrification of everything,” said Darryl. “That demand mandates new resources. And these new resources are being incentivized not to be carbon-emitting.”
See the full article: Markets react to prospect of 'blue wave' in Georgia Senate vote