In this special Canadian episode of MarketFoolery, Chris Hill chats with Motley Fool Canada analyst Jim Gillies. They talk about the importance of investing in the right index funds, and give their analysis on Etsy (ETSY 0.08%) as a stock to buy right now. In addition, Jim shares his three top stock picks from Toronto Stock Exchange that are also listed on the NYSE.
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This video was recorded on March 2, 2020.
Chris Hill: It's Tuesday, March 3rd. Welcome to MarketFoolery. I'm Chris Hill. He made it over the border from the great, white North, with me in studio is Mr. Jim Gillies. It is good to see you.
Jim Gillies: It's good to be seen.
Hill: Thanks for being here. We're going to dip into the Fool mailbag. You've got some Canadian stocks. Right before we started, I said, "Give me some stocks. I need some Canadian stocks," and you said, "Oh, I've got stocks for you."
Gillies: Oh! We can help you out.
Hill: So, we'll get to that. But the recent unpleasantness in the stock market was something that you were -- I don't know if I should say you were blissfully unaware of it, but you were out of pocket all of last -- so, last week was the worst week for the U.S. stock market since 2008. And you were on a ski slope.
Gillies: Missed the whole damn thing. [laughs] I was skiing in Quebec.
Hill: And were you completely out of pocket or were you just like, once a day you'd be like, "Oh, that's interesting."
Gillies: Pretty much once a day. It was probably the first vacation I've gone on in 15 years where I haven't taken my laptop.
Hill: Good for you.
Gillies: I had my phone with me so I could look at the notifications, very helpful, all upper-case notifications sent to me quite frequently by the fine folks at CNBC. And I just kind of looked at my partner and said, "Well, we're poorer than we were 20 minutes ago, why don't just let's go hit that hill." [laughs]
Hill: So, I don't want to go overly psychological on you, but I am curious, at any point did you think to yourself, did you have, sort of, the gut reaction like, "Ah! I should have brought my laptop," I would be making moves, I would be making some trades, either I'd be buying some stuff that's on sale or I would be finally cutting my losses with some things that were even lower than they were a week prior, or did you just think, "No, you know what, I'm glad I don't have the laptop?"
Gillies: I did miss the laptop. I have a mild regret that I couldn't buy a couple of things that I would have liked to have added to, a couple of things that are a lot cheaper than they were about a week ago. Especially, there's a couple of names that I happen to think will do better in a recession. So, if the coronavirus, which, of course, is the catalyst for what touched off last week's issue --
Hill: Yeah, I know, unlike you, I wasn't skiing, I've actually been in this. [laughs]
Gillies: You know, I'm very well relaxed after last week apparently. I have a couple of names that I actually think will do better in a recession, so I maybe would have liked to have added to them. And just a couple of names of companies I've long admired, don't own, that I would have liked to have initiated a position. But actually, you know, peeling back the kimono perhaps too much for some people, at The Fool here, we have to pre-clear any transaction we want to do. We have Fool trading restrictions and what have you. And so, I had no access to our compliance system because I didn't have my laptop with me. So, I was like, well, I'm doing nothing this week, I can look at the market or I can go skiing, so. But I would have liked to have added a couple, having come down here now today, I'm here today and tomorrow, I might. I'll probably wait until I get home before I do anything, and hope the market doesn't rocket up 4,000 points by Wednesday morning, so.
Hill: What was the reaction of your partner?
Gillies: Oh, she doesn't care.
Hill: OK.
Gillies: No, she -- you know what, I mean, you've met Louanne; you've met Lulu.
Hill: Yes.
Gillies: And she is absolutely rock-solid in terms of -- she has, I think, probably since -- you know, she turned about 25, like, every paycheck, you know X% of the paycheck goes into an account. And she did it all the way up into 2007/2008. Never batted an eye. Went through that, kept going. I met her in 2012, and her biggest regret -- I'm going to speak for her and she can set me straight when I get home, I suppose -- but probably her biggest regret is that she was trapped, if you will, with a not great financial advisor who put her in a bunch of garbage mutual funds. So, when she met me and I said, "Boy! you've had a bunch of garbage mutual funds here, there is a better way to invest regardless of your risk tolerance and what have you and let me talk to you about passive investing and ETFs and supplementing that with some good high-quality companies depending on what your risk tolerance is." And she's like, "I wish I'd known about this ten years ago," because when she did transition from what she was doing with that "crappy mutual fund hawking financial advisor" to largely doing it herself. And now she just, I think every three or four months, she goes in an adds to her ETFs and that's it. And that's all she wants and that's fine, but she says, "I wish I'd known that in 2003/2004 when I started this, because in 2012 when she met me; 2013, when we first started talking about money. She's like "I think I might have as much as I've contributed over the past decade plus." And I'm, like, we should really have more -- investing is to have more, you're differing today so you'll have more tomorrow, you should have more.
But I did actually, as she was transitioning over to this new Foolish way of investing, if you will, because I truly believe that index funds are Foolish for a lot of people in terms of --
Hill: Capital F.
Gillies: Yeah, capital F Foolish.
Hill: We are fans.
Gillies: We are very much fans and that's supplementing. During that period of time, I sometimes occasionally enjoy a little sparring with people in the industry, and so I got to write a couple of very direct notes to her financial advisor about why they wanted to free up her money yesterday and perhaps rethink their choices in life. So, I enjoyed that.
Hill: I bet you did.
Gillies: I did, I really did.
Hill: I also like that you met her in 2012 but it wasn't until a while later that you lunged into the financial stuff, because I'd hate to think that it's like the first date with her and you're like, "So, tell me about your investing life." [laughs]
Gillies: Well, you know, again, kimono is way too open at this point.
Hill: Can you stop saying that?
Gillies: I know, it's a Bill Mann-ism, I think. She's a chartered accountant with a master's degree in accounting. I'm a finance nerd, so I mean, like, look, that's kind of, you know. Yeah. And we've had serious discussions about the proper ways to record and recognize deferred tax liabilities. So, like that's Friday night at the Gillies' house, right. [laughs]
Hill: Our email address is [email protected]. Question from Zach Gaines at the University of North Georgia. Go Nighthawks! Zack writes, "I'm a huge fan of all The Motley Fool podcasts. I've heard you talk about Etsy and Pinterest, I know you should keep your eyes open for investment ideas, so I wanted to pass on a story. While sitting in my strategic management class today, I got distracted by the people using computers next to me. The girl on the left spent the entire class browsing makeup ideas on Pinterest. The guy on the right spent the whole class looking up watches and belts on Etsy. I've been considering both for my investment and my experience today has only increased my conviction. Just wanted to pass on the boots-on-the-ground research."
Thank you, Zach. I love that email for a lot of reasons. I love that Zach is doing a little boots-on-the-ground research and passing it along and I like that he's basically saying, "Hey, of the three of us, I was actually paying attention in strategic management class. It's the others who were -- without naming them; you know, because he doesn't want to get anyone in trouble." You're not at Etsy shareholder, you got to be pleased by this.
Gillies: I am. I also used to teach university, but I taught largely before the days of the iPhone. And thank goodness I did because it was hard enough getting people to pay attention anyway, I can't imagine what the profs today do. But, yeah, no, I own Etsy. Etsy is a story that we like in Fool Canada and Stock Advisor Canada. It was brought forward to us by one of the investing teams. We inherently like the idea because of the idea that you can -- Etsy basically brings every kind of farmer's market, someone making something unique and cool, maybe a little bit quirky, it brings every market to your front door kind of thing.
And so, for example, the aforementioned partner of mine at home recently bought a $90 specialized dog collar off of Etsy for our newest family member. It's a dog, by the way, just in case you're wondering. You know, the hamster has a collar. But, no, I mean, she found something really unique that spoke to her and she went and ordered it and I kind of just rolled my eyes.
And we like the idea that they have that distribution; you can pretty much have anything you want on your front door. We like that they are investing in the business a lot. The new CEO came on -- well, not so new anymore -- two-and-a-half years ago, I'm going to say, he really changed up the cash flow dynamics of the company, which we really like because we're -- at least I'm a cash flow investor, cash flow valuation guy.
They made an acquisition in the music space called Reverb about a year ago. Less enthused about that, but it's not the worst acquisition I've ever seen.
Hill: I remember when they made that though and it seemed like they didn't pay a ton, but like it struck me at the time as a slightly odd use of capital, but it also didn't strike me as, "Wow! they paid a ton of money for that niche, musical instrument site."
Gillies: Yeah. I think, if memory serves, and it might not, they paid about six or seven times sales. And Etsy at the time itself was trading at about seven or eight times sales. So, you know, it's not that out of the line with where they were. But Etsy promptly fell from high $50s/$60-ish to about $40. And Etsy was brought to our attention in Fool Canada at just shy of $60. And we said we really like the story, we don't like the price, we don't like the valuation. And then they had an earnings report that was poorly received and the stock fell and then it drifted down, as these things tend to do, and it ended up going to low $40s, and that's where we got it. And so, we're quite happy with that. So, today, I think it's back up close to $60-ish, maybe $58, $59. And we're really happy with the price we paid. And, yeah, as you mentioned, I am a shareholder and I would happily buy more if we got that lower price. And in the meantime, I also play options games, so I have written some puts against it.
Hill: Scale of one to 10, how confident are you that Etsy, which has a market cap of just under $7 billion, how confident are you that it will be a stand-alone company in five years, because it seems like it's still small enough that a couple of years from now, if they're really continuing to deliver, that someone's just going to go in and buy them?
Gillies: Can I predict who's going to buy them?
Hill: Absolutely. So, that sounds like you're not even remotely confident that they'll be a stand-alone company in five years.
Gillies: I don't think they're going to be a public company within five years.
Hill: Who's going to buy him?
Gillies: So, eBay (EBAY +1.50%) makes a lot of cash and has no growth. And eBay is selling off StubHub for $4 billion. Did I mention they have no growth? Well, actually, StubHub has a bit of growth, but did I mention they're selling StubHub off. eBay's Classifieds Groups. So, Kijiji and all the different car sites. They are getting pressured from a couple of activists, Starboard and Elliott, to sell off Classifieds. That's going to be another $10 billion and that's another growth avenue that they have. Did I mention they don't have any growth?
Hill: I'm an eBay shareholder. I'm keenly aware of the fact that they have no growth.
McKelvey: eBay the world's worst capital allocation company. I have option positions on eBay as well, so I share your pain. But eBay and Etsy, just, you know, boy! eBay Marketplace, I mean they are exceedingly cheap and they do make a lot of cash and heretofore they've been running that cash and just buying back their own stock. I think they bought back 35% of their own stock in the past three or four years. They get $10 billion from classifieds, turn around, and go buy Etsy.
Hill: All right, before we wrap up, and before you head north, give me three Canadian stocks. To the email that Zack sent, you know, we talk about things like Etsy and Pinterest, but there's an entire universe of stocks that you are intimately familiar with that I am not.
Gillies: Probably?! [laughs]
Hill: [laughs] Not probably, definitely. This is your everyday job, so. I'm not saying I'm going to run out and buy these three stocks, but I'm just looking to expand my horizons and that of the dozens of listeners who may not be focused on good business opportunities north of the border.
Gillies: So, do you want them on both sides of the border, so in other words, they trade on, both, the Canadian exchange -- they are Canadian company, trade on the Canadian exchange -- as well as having a U.S. listing or do you want Canada-only?
Hill: You know, the dual listing would be convenient.
Gillies: Dual listing works. OK. So, we'll go in order of declining size. So, the first company is one that probably everyone's already heard of, and as we had it first is -- and it's not Shopify -- is Brookfield Asset Management (BAM 1.01%). So, there is a company in Canada called Fairfax Financial, run by a guy named Prem Watsa, that gets a lot of attention as being Canada's Berkshire Hathaway and Canada's Warren Buffett. It's all complete nonsense. Canada's Berkshire Hathaway is actually Brookfield and it's run by a guy named J. Bruce Flatt, who is Canada's Warren Buffett. Brookfield is investing in a host of real assets. So, ports, toll roads, buildings, anything infrastructure-wise, and as well they also have several publicly traded, kind of, offshoots where they still own the majority or they own a large stake. I think one of them is about 30%, but they're generally 50%, 60%. So, the Brookfield Infrastructure Partners, Brookfield Property Partners, there's two or three more I'm not thinking of. They had some insurance operations which they spun off, just a tiny little piece, but they all still own 20% of the silly thing.
So, it's a very complicated, complex structure, but if you, kind of, dial it back, you look at Brookfield they have... I think, Bruce Flatt is looking at doubling their free cash flow over the next four, five years, and they're already trading at a reasonable valuation. If they double their free cash flow in five years; I think it might be four, that was the forecast, but let's say five. They double and they're going to go from a reasonable valuation to either the stock price goes up or this is a fantastic valuation. Brookfield it's BAM.A on the Toronto Stock Exchange or just BAM, I believe, on the New York Stock Exchange.
As long as interest rates are low and people are looking for return, these guys are your place for real assets. They're going to preserve value at fairly unique assets through whatever we're doing in terms of the economy here. So, that's kind of the largest one of this triumvirate I'm going to introduce you to, although I'm pretty sure you've heard at least of Brookfield.
The second one I would talk about; I'm, kind of, doing this on the fly as a look here. The one I would talk about is Restaurant Brands International (QSR +0.74%). Which is --
Hill: That one we've talked about.
Gillies: We have. Yeah. And so, Restaurant Brands is the parent company, it's a franchisor, so essentially, they franchise out their restaurants. They have three concepts. Burger King, which inexplicably has close to 19,000 outlets worldwide. Tim Hortons, Canada's favorite garbage coffee brand. I'm mad at Tim Hortons again right now, because they can't get their app right. And I said to the guy this morning as I was driving to the airport at 4:30 in the morning, you're really wanting me to go back to Starbucks, aren't you? And then, the third brand is Popeyes Louisiana Kitchen.
Hill: Which put up the most ridiculous same-store sales.
Gillies: I was just about to go there. Their most recent quarter, they somehow did 34% same-store sales on the strength of a viral marketed chicken sandwich.
Hill: Which is pretty tasty.
Gillies: My son had one and he's like, "Yeah, it was really good." [laughs] "OK, dude." No, I really like franchise businesses where essentially, you're taking on no operational risk, you're not spending a lot of capital, but these thousands of restaurants. I think there are somewhere about 28,000 total stores between -- well, Burger King's got somewhere about 18,005, Tim Hortons is shy of 5,000 worldwide, and I think Popeyes is about 3,500, ballpark. You know all of these guys are sending you 6% of their sales every month off the top-line, plus they're contributing to advertising funds. And what it ends up being for the franchisor is you're swimming in cash and don't know what to do with it. So, it's paying a real nice dividend now. And after the recent unpleasantness, I noticed that it's down about $10 a share over the last week.
Canadians are going to Tim Hortons and they're going to Tim Hortons today as much as they were last week. There is a lot of cash there and you're paying out as dividends and they're doing some deleveraging. And I suspect they're probably going to make an acquisition. They've bought back some shares, not a lot. They don't really have a lot and they don't seem terribly eager to reduce their leverage. Like, as their cash has grown, their leverage has been paid down a little bit, but they seem comfortable operating at a certain level. I would expect them to probably go after another acquisition to supplement their three strong existing brands rather than we're going to buy back 20% of our stock or whatever, so. And it is trading at a reasonable valuation, relatively speaking.
Hill: What's last?
Gillies: So, I like my stock picks occasionally to be a little bit ridiculous --
Hill: ... from a business standpoint. We had insurance, we had the stayed insurance company, insurance and infrastructure, we've got the franchise restaurants, this is going to be an insane business, isn't it?
Gillies: So, I'm going to introduce you to a company called CRH Medical. They are CRH on the Toronto Stock Exchange or CRHM if you're a U.S. investor. So, CRH Medical has two lines of business. Their long-standing, but smaller line of business is hemorrhoid treatment. But about five years ago, they said, "We're going to diversify this business. We are going to go into the high-octane business of anesthesia clinics for colonoscopies.
Hill: OK.
Gillies: [laughs] So, I mean, I've hooked you right now, like, you know, where can you get investing advice on colonoscopy anesthesia and hemorrhoid treatment?
Hill: Right. If you liked Intuitive Surgical, stay tuned because we've got, eh, maybe not exactly the same but in roughly the same ballpark of medical procedures.
Gillies: Yes. Look. OK. Because it's kind of uncomfortable, we inherently laugh at it. Colon cancer kills. Colon cancer is also one of the easiest to treat, like +90% survival rate if you catch it early. Now, I have a friend who last year, they caught it early. OK. And I've been skiing with him since. And he's fine. Colonoscopy, right now, I think we're at about two-thirds screening on both sides of the border. I think they recommend everyone over 50 gets it every five years, just because, you know, we want to catch it early. Because it's far better to catch it early and treat it early than it is to go to the expense of having you under the tender administrations of the healthcare system on either side of the border, where maybe your outcome isn't as good.
And so, I know that in the U.S. they have a goal of hitting 80%, within five years, of the target population having colonoscopy having proper screening. So, here is CRH, they're in Canada, Vancouver to be precise, but a 100% of their business is in the U.S. They've been buying up, they're doing a rollup strategy, buying up these anesthesia clinics. Where there's a natural growth in procedures and you, kind of, want to do it under anesthetic, not to be too obvious about it, but I'd, kind of, prefer to be knocked out frankly. And so, great, we're going to do this.
So, there's about an organic growth rate of about 1% to 3% in procedure growth in the number of clinics they already own and operate. They are buying up to the tune of about $30 million, $35 million a year, additional clinics. And those, of course, are going to be growing at 1% to 3%. They've got good capital provided by dead capitals plus they are cash flow positive, they're doing really well in terms of -- I think they're getting about $315, ballpark, per procedure.
So, you're running the number of cases and if you actually take the number of cases they're running multiply it by the cash flow that they're generating, multiply by how much -- you, kind of, quickly find out that not only is this company not trading at any kind of a rich multiple, but you know they could probably justify the entire company just in terms of the cash flow generated over the next three or four years, forget about actually running this growth business.
And the other thing is too, is that the CEO has an interesting contract here. He gets a really nice payday. I should say, the stock right now is trading about $3.40 U.S.
Hill: $3.40.
Gillies: Yes. He gets a really nice payday if he sells this company for $7 U.S. plus. He gets an even nicer payday if he sells it like for over $10 or something like that. But so, I think he's probably incented to -- to quote Munger-Buffett, you know, follow the incentives -- keep growing this business. Managing to get up above that level and then find a strategic buyer who wants to get bigger, and then he rides off into the sunset with a nice payday.
Hill: Jim Gillies, we don't do this enough.
Gillies: We don't.
Hill: Get back up.
Gillies: I will try to get back down sometime in the next year.
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.
That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
