Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
7investing CEO Simon Erickson recently interviewed The Canadian Investor host Braden Dennis. He is also the CEO of Stratosphere, a financial data platform to help investors save time and jump directly into a company's most relevant metrics.
December 15, 2022 – By Simon Erickson
We often need to remind ourselves that “international investing” doesn’t just mean replicating things that worked in one country and translating them into another.
Countries all have their unique peculiarities. Some, like our domestic U-S-of-A, enjoy watching baseball, eating hot dogs, and shooting off fireworks for the Fourth of July. For others, like our beloved neighbor to the North, it’s more about hockey, beaver tails, and Boxing Day.
But Canada also offers a different intrigue in its investing culture. Its stock market is dominated by massive corporations who compete in energy, materials, and financial oligopolies. Nutrien (TSX: NTR) sells $30 billion per year of agricultural fertilizers every year, while Enbridge (TSX/NYSE: ENB) does $40 billion annually primarily in liquid fuels. Meanwhile, progressive cities like Toronto house cutting-edge tech companies in telecom, e-commerce, and artificial intelligence. Blackberry (TSX/NYSE: BB) (formerly Research in Motion) and Shopify (TSX/NYSE: SHOP) are examples who call Canada home, yet are publicly-traded on both the Toronto and the New York exchanges.
We’re already well-aware of the volatility caused by the rising inflation and the rate hikes here in America. Are the same macroeconomic challenges facing Canada as well? And beyond those short-term challenges, are there opportunities in the Great White North that long-term investors should be considering?
To answer those questions, 7investing CEO Simon Erickson recently interviewed The Canadian Investor host Braden Dennis. Braden closely follows Canada’s equity market and covers its opportunities on his podcast. He is also the CEO of Stratosphere, a financial data platform to help investors save time and jump directly into a company’s most relevant metrics.
In the conversation, Braden shares his thoughts about Canada’s equity markets, real estate prices, impact of COVID, and secular trends that are developing. The two discuss why Constellation Software (TSX: CSU.TO), Brookfield Corporation (NYSE: BN), and Shopify (TSX/NYSE: SHOP) are opportunities that investors should consider.
Publicly-traded companies mentioned in this podcast include Amazon, Brookfield Corporation, Constellation Software, Netflix, Research in Motion, and Shopify. 7investing’s advisors and/or its guests may have positions in the companies that are mentioned.
Don’t miss out on our future interviews! 7investing will be publishing upcoming conversations with the CEOs of PubMatic, Rocket Lab, and more. Join 7investing’s free email list to get our podcasts and investing insights delivered directly to your Inbox.
Simon Erickson 00:00
Hello, everyone, and welcome to our seventh investing podcast where it’s our mission to empower you to invest in your future. Seven investing provides our seven top stock market opportunities each and every month, you can get started today for just $1. At seven investing.com/subscribe 2022. The year the tiger it’s been an interesting year for equity investors, a lot of challenges, but also a lot of opportunities. And we’re looking into where those opportunities exist. They’re not all just within America’s own domestic borders. And as such, I’m really excited to welcome our guests to the podcast today, Braden Dennis is the host of the Canadian investor. He’s also the CEO of stratosphere.io, which provides a lot of financial data for publicly traded companies are going to take a look at the International picture here today. Right. And it’s a real pleasure to have you, thanks for being a part of our seven investing podcast.
Braden Dennis 00:48
Simon, thanks for having me. This is gonna be fun.
Simon Erickson 00:51
A break, we’ll chat about a couple ideas that you know are on your radar. Right now we’ll talk about different sectors within the Canadian economy and just a moment here as well. But maybe let’s start with the macro. Right? It seems like every every conversation starts with the macro, we’ve seen a lot of macroeconomic challenges. Is any of this influencing your investing style? Or what’s your approach to investing in the stock market?
Braden Dennis 01:13
You know, what I always say Simon is on the way up, everyone’s a stock picker. And on the way down, everyone’s a macro economic expert. And, you know, we’ve seen that kind of play out real time. And it should be important to recognize that also, incentives wise, if you look at financial news media, and where are the people consume information on a daily basis, the macro picture, when things look bad is always going to be the most interesting. And the most click driven incentive structure that that financial news can confine. And so it’s always important to start the context there, especially today, I think everyone’s information diet is just one of the most important things. And so you’re right. Okay, so a lot has changed in just a year, right? You went from a completely different Fed policy 16 ish months ago to aggressive hikes and off the back of what we’ve seen and why they’ve act this way. very persistent, high inflation. And so we’re paying basically for this COVID Hangover, that is, doesn’t just fix itself right away, you can’t have that kind of pot, that type of Fed policy, and then you know, everything’s gonna be okay. So they have to, you know, counteract the decisions that were made two plus years ago. And they’re, we’re basically paying for it now. And markets move with certainty and uncertainty. And when you have a very uncertain interest rate picture, the market does not like that. And so, you know, for the last, let’s say, 12 to 24 months, as you and I were talking before, it didn’t matter what y’all did. It was just it was just great times. And now we’ve seen really that one price matters a lot it always did, in terms of valuation, profits definitely matter. And, you know, capital allocation matters, stock based compensation matters. All the things that worked historically don’t work long term, what works long term when businesses compound free cash flow per share over time. And a lot of those things are not intuitive, or reaching the outcome of free cash flow per share. Heavy stock dilution with stock based compensation, limited profits, let alone no gap profits. And just growth at any cost is the regime that we really just shifted out of in the last like eight months. So I’m saying all that, with a lot of optimism for great quality businesses that can continue to compound free cash flow per share for a long time to come here. You’re given better multiples, you’re given a better free cash flow yield on buying those assets today than you were a year ago. And so that should be celebrated for long term investors. Even when the macro picture looks uncertain. It always looks uncertain if the world its its human civilization, when has it not? Looked uncertain? And so I say I say this setting the stage with more optimism than than not.
Simon Erickson 04:44
We were joking around right before we started recording about the board apes. The NF T’s are selling for hundreds of 1000s of dollars. Not a lot of cash flow is attached to a lot of those things that were fetching premium prices a year ago. You and I share an interest in lunch term equity investing, right? Like you mentioned kind of cash flows over time, things like that. Is your investing approach changed at all? I guess within these past 12 months, the rising interest rates and the inflation and everything else that we talked about that is a challenge. Is that impacting where you put money to work right now? Or do you think about things any differently?
Braden Dennis 05:18
Um, I would say yes, and no, what I would say is that, it just reinforces my beliefs and opinions that I’ve always had about profitability, and valuation. Now, I am not immune to kind of what worked in the past, you know, previous regime for whatever we want to call it. You know, I went against some rules and bought expensive stocks, a tiny, tiny positions, we’re talking about, like, really small positions, I always wait my conviction to the waiting in my own personal portfolio. But you know, I was not immune to some of the mistakes that you see people make. I think a lot of people made a lot of mistakes, including some of the most brilliant well known investors that are widely recognized that some of the best in the business, they’ve been doing it for a really long time, no one was really kind of immune to that. That being said, people are realizing hopefully, that price certainly mattered the whole time, it always did, it never didn’t. And that real business quality does matter. You can’t just grow at any cost. You know, the laws of unit economics are not broken by these hyper scalar type companies. And, and I’m, I’m there, I am not trying to buy companies that are not growing, I’m trying to probably in like a Gharbi camp like growth at a reasonable price. But you can’t just grow it at any cost and break the laws of unit economics, that that that is a notion that was sold by venture capital, like actually to the private markets, getting huge mark to market valuations, and growing and scaling at any cost. Some of these have gone public, and still burning more cash than ever, each quarter. And so I have learned, and I think many investors have learned that these hyperscalers are not the dream of operating leverage that they were may be promised to be. And what I mean for the listeners by operating leverage, as you have increasing top line, and theoretically, with these technology, companies that have a potentially infinite scale with with low variable cost is that the more you grow, there’s going to be a bigger gap between the top line and the bottom line. And that’s going to ultimately produce operating leverage. And as you scale, that gap gets wider, and you get bigger and bigger profits. Has that happened for these hyper scalars? No, not not even close. And so we’ve had to ask yourself some hard questions about those specific companies.
Simon Erickson 08:03
Those are great points. Braden, like you mentioned, you know, a lot of those fast growing software companies have seen longer sales cycles, it’s harder to close deals. And like you said, there was certainly a contraction in their valuation multiples as they realized that it was not always so easy when it budgets wouldn’t allow for more and more growth. It sounded like you know, if I’m hearing your, your investing stock correctly, is growth at a reasonable price, you still like to go after growth and future cash flows. But we still should be mindful of valuation, especially right now of all times. You’re based in Toronto, you’re our northern neighbor up there. It’s a little chillier. Right. But we do look at a lot of the same types of companies. I’ll talk about the individual companies in a minute, but maybe first, can you tell us about the Canadian market? You know, if not sectors that are appealing to Canadian investors? Is there a similar Silicon Valley go for the growth mindset up there, like Toronto has a very tech forward kind of city or just kind of more broadly, how do investors in Canada like to approach the stock market in publicly traded equities?
Braden Dennis 09:03
Yeah, you know, it’s funny, I host a podcast called The Canadian investor, also with a guy named Simon. So I’m right, I’m right here. He’s a French Canadian, so it’s more like CMO. But you know, if you get that you get the idea. And it’s funny because we talk about Canadian stocks every once in a while, but not as often as you’d think. And the reason for that is we’re talking about a significantly smaller pool of high quality companies. In Canada, we have largely three main sectors, we got energy, materials, and financials. The Canadian banks, being in the financials is like such a gigantic piece of the market cap. You know, if you look at the s&p today, it’s like Apple and Microsoft make up like 15% The banks in Canada make up like 25% depending on the day. Depending on the day, you’re looking in terms of market cap In the index. So what you get is a long list of wonderful compounds that are in oligopolies. Like the banks like the telcos. Those have been exceptional compounders. But you know, probably they how much room how much group room for growth is there really, I’m not sure. And what you have is basically underweight, pricing power businesses, an underweight scale outside of Canada, as a generalization, that’s what I would, that’s my knock on the Canadian market.
Braden Dennis 10:45
The pros are some really, really wonderful companies that do have scale, globally, that are under recognized, not as loved by the market, they might not get the same amount of attention. And even better, is if they only trade on the TSX. Like a montage on couche tard, which is the owner of Circle K, I’m sure you’ve seen them all across the states, only trades on the TSX. That’s like a 50 $60 billion dollar market cap company that no one talks about. Constellation software as a 45 billion in market cap company, it’s a roll up of vertical market software companies. It’s compounded at over 30% annually since its IPO only trades on the TSX. And so you do get some less crowded, really great compounders in there as well. So it’s a bit of some pros and cons. I think overall, one mistake that I see a lot is Canadian home bias or any sort of international home bias. You know, if you’re an investor in who lives in the UK, typically you’ll be very overweight UK companies compared to the global equity landscape. Same with in Canada, wherever you may be, that home bias persists a lot, and it certainly persist. And the people I talked to here, basically only owning domestic equities. I see this as a big mistake. Where have you wanted to own equities, globally so far, for the last 50 years in the US, and the next 50 years, I tend to think that it’s the US as well. And so I do think that there’s a opportunity for international investors and Canadian investors to be more globally diversified. And it’s never been easier from a cost perspective now than it ever was. So there are pros and cons for sure. And there’s some common mistakes I see definitely. But I will say that if you look broadly at the competitive landscape, there are a lot of very, very solid wide moat oligopolies that are basically just protected inside of the inside of the border. When it comes to the telcos and the banks and a few other sectors have been wonderful to own. Very true
Simon Erickson 13:15
oligopolies. No doubt about it. You know, whether it’s potash of Saskatchewan, you know, the materials companies or the giant banks and telcos, you mentioned Can we talk a little bit more about Toronto specifically, you know, Toronto has been kind of a pretty innovative city right? Now, if you go back in time to the research and oceans and you know, the smartphones, and then we kind of had the Shopify and E commerce push. And I know in recent years, it’s been more more all about artificial intelligence research, you know, the image nets and, and the other things that are kind of going on in the academic level right now. What’s the vibe like in Toronto right now? Is it still feel similar to to San Francisco? Or is the housing getting completely out of control there? I mean, what’s going on in Toronto these
Braden Dennis 13:53
days? Well, housing, we could probably have a whole podcast and yes, out of control, still even on like, you know, seeing home prices on like, 30 plus percent draw downs from from when they are bought at the peak, and like October ish of 2021, which is not normal behavior for these types of assets. But when you have rates zero, on overvalued homes, move up to you know, variable rates going 6% Plus, something’s gotta give right like II can’t just defy gravity forever, right. So there’s that certainly happening in the technology space. There are a lot of interesting and I’m talking private here. I run a tech startup today. We’re almost all located in Toronto, you get some interesting dynamics where you have more reasonable salaries for tech talent than in the Bay Area were talking about quite significant. And then, you know, you could be serving up a global audience charging in US dollars and run your business in Canadian dollars. So there’s some arbitrage on currency there as well. There have been really nice grants and incentives for building startups here like shred, which is good enough to get into it, but a huge tax rebate on talent for hiring here in Canada. So there’s a long list of reasons to be very excited about building companies here in Toronto, and some of the major cities, you know, like Vancouver, Montreal, there’s been some wonderful companies come out of there. I do think that it took us a lot longer to come out of that COVID Hangover, which because of the policy here, which, again, not going to get into, because, you know, my blood might start to boil.
Simon Erickson 15:48
A little high level there will be sprayed without the blood boiling too much. Can you tell us about kind of the policies that are in place? It might be different in Canada than the US here?
Braden Dennis 15:57
Yeah. So you’re in Texas, right? Yes. The, basically, if I can paint an idea for you, for those who are not familiar with it is you largely had south of the border, you know, us watching the US completely, what I’ll call back to normal, even if it’s, ah, like, not quite not the same. But I would say back to normal for well over one year, talking to almost two years of us just watching that and going, what’s the what’s the deal here? Like, something’s gotta give.
That’s to give you everyone an idea of how much longer it took for, you know, a real recovery in like, normal life and small business and the livelihood of the city here in Toronto. It I don’t even think it was really felt like a Toronto’s normal again, until like September. And today’s December. Like, that’s how long it was. And so, yeah, that’s kind of the lay of the land on Toronto today. And I’m not speaking on behalf of, of everyone who lives here in the city. But improving for sure. And there are amazing, like programs, and the currency arbitrage and the salaries, makes it a really good place to build a company. I think I am, of course biased on that front. But there are a long list of reasons why it’s a pretty great place to build a company.
Simon Erickson 17:46
I did visit Toronto a few times. And then a few of the trips back I actually told myself, I think I could really live in this city. It’s a diverse city. It’s a progressive city.
Braden Dennis 17:55
What you there in the winter?
Simon Erickson 17:56
No, no, I was not. That’s why there was no snow on the ground. It was beautiful outside. And Texas, you know, it was very high.
Braden Dennis 18:04
Exactly. Yeah. You know, what, from about May to September, I’ve been all over the world, there’s actually no place I’d rather be is, you know, kind of home from May to September, and then the rest of the year. Yeah, a lot. You can kind of just bounce somewhere else. It’s a little bit warmer. I think. That’s what a lot of people do here. They’re called snowbirds. So they basically they’re here May through September, they enjoy the lakes, the nature, it’s, it’s a really great place to be. And then, you know, as soon as the groundhog sees his shadow, or whatever you’re out there.
Simon Erickson 18:42
There’ll be noted break before we talk about some individual companies that are on your radar. Just one more question about AI since we’re talking Toronto, you know, Toronto is the birthplace of so many of these AI startups and things. We saw a lot of them come hot out of the gate. You know, a lot of the stuff you were mentioning earlier, we’ve seen a lot of those stocks selling off 60 or 70%. And certainly we’re kind of in a more constricted economy right now we’re seeing contraction in the economy. We know the pendulum is gonna swing the other way though, we know there’s going to be money for the taking again at some point in the future whenever that is, do you think that there is a an oversupply of AI right now? Do you think that companies are going to come back out into this hot but it’s they’re gonna have to weed out a lot of those are where do we stand in terms of startups plus capital plus AI technology? The world being you got a front row seat event up there in Toronto?
Braden Dennis 19:30
So Well, there’s two things happening. One, one thing that I’m seeing a lot just because I’m kind of plugged into the the entrepreneurial and tech startup space, is I’m seeing a ton. A ton of startups coming out of the woodwork and probably raising on some silly valuations are basically just building on the rails of open AI API’s. And so no differentiation In, basically race for marketing on terms of like they’re providing a similar service, whether it’s like, copy for copywriters, like, there’s a lot of like marketing ones, like, you can write into this into the AI tool, and it’ll kind of write all your marketing for you. By the way, it’s incredible. But they’re basically piggybacking on the rails of the API providers that are, you know, the kind of the picks and shovels behind it. So that’s one category, something’s got to give there, eventually, they’ll, there’s going to be some winners, and there’s gonna be lots of consolidation, but some of it will get washed out, for sure. And then number two is like the ones that are building the actual infrastructure, and the picks and shovels that I was mentioning about the companies that are supplying that wave of those startups, there’s going to be some absolutely mega winners out of there, no doubt, I predict that in 2023, we will have a ridiculous venture capital infused bubble in AI, you know, it was it was crypto and web three. And then there’s going to be this AI and, you know, startups that are using buzzwords like AI, but not really actually doing anything proprietary in terms of actual machine learning in there. So it’s going to be a bunch of that. But, you know, I’m an engineer by background, but I am not a computer engineer, I don’t have any expertise in machine learning. So it’s gonna be really hard for me to kind of decipher what’s a winner. I’m not in public markets. But that doesn’t mean I can’t learn. That’s one thing that I really tried to do is at least have a really good understanding of how the pieces work and how individual businesses work. Before even thinking about opening a position like that’s like, just basic stuff, I think people have jumped into so many names they don’t understand. And then what happens when the market goes the other way, is, they can’t decipher they have no real conviction on if it wasn’t good business to begin with, when the price starts to drive narrative on the downside. So just knowing something really well. And I’m not there on lots of names that I’d love to be there with. I don’t think I’m quite there with artificial intelligence, or cybersecurity. Two things that I think are obviously going to be massive thematic events over the next 50 years that I’d love to be a part of. But I don’t have the base to figure out quite which ones are the winners in cyber, I think probably CrowdStrike, and Microsoft are the leaders there. But I can’t say that with complete confidence yet, in three, six months, maybe I will. But that’s, that’s the level of time I think it requires to really get a foundational level to be able to be an owner of these businesses. Because I’m not looking to be a stock trader, I don’t want to be in and out of stuff. I’m looking to buy something that I can be an owner and think like an owner over the next 1020 30 years, and monitor that thesis because things change all the time.
Simon Erickson 23:08
There’s a great points really, when we think about it kind of there’s a saying out there that new technologies or innovation is often the overvalued in the short term and undervalued in the long term. It used to be that if you if you could write that you could code the Python on your resume, you might as well add a zero to whatever you were going to ask for for your salary. And if you were an enterprise or trying to go public, you know, if you added crypto or blockchain to the description, you could add a couple of zeros to your valuation. Certainly we’ve seen those contract, but it doesn’t mean that they’re down and out. It just means that innovation takes time to be understood. Great point about AI potentially being overvalued, especially in 2021. If not 2022,
Braden Dennis 23:46
or jumping in one thing. One thing I’ll jump in there is you don’t have to be early to these huge, huge secular winners. How many times could you have bought Amazon over? Since it’s a public company? How many times could you have bought apple over its time as a public company? You know, you everyone I knew already had an iPhone in their pocket before Buffett ever entered the apple position, which you know, dollar for dollar might be the greatest trade of all time. And so you don’t have to be right there on the ground level for some of these secular winners. Sure, you’re gonna get rewarded for for being there earlier. But you still could have made life changing wealth over time, just, you know, not being there. First, you’ve had multiple opportunities, and multiple market declines to try to take advantage of of being a shareholder in some of these mega winners too.
Simon Erickson 24:43
Yeah. And back to the operating leverage you mentioned. Right so you know, if you were a publicly so if you were a privately held company, there was the right sectors and you were giving being given a 2030 times sales, you know, top line sales to come public and 2021 or 2020, even for that matter. You took it right you saw all the IPOs If not the specs and you know, the private listings that are the direct listings and everything else that we saw, there’s a lot of money that came into public markets. We have not seen that, in the recent years, companies are kind of gearing back up figuring out the profit side of the equation. Be a little more cautious. I think it’s good for investors for all of us in long term to Yeah, I agree.
Braden Dennis 25:20
Yeah, those companies were given extremely high multiples to go public. And so many of them did smartly. I mean, the cost of capital for them became so low. And that’s why they kept issuing a ton of stock, whether it be SBC, or actual, you know, offering more shares on the market, it made sense to right, like it made complete sense from a cost of capital perspective to do so. The only problem is, is the tide, the tide change pretty quick, from when all that happened to where we are now today. So there’s definitely pros and cons when these companies are subject to public markets. You know, like I said, a lot has changed in the past year.
Simon Erickson 26:10
It has been an interesting year indeed, we’re gonna get into chat about stratosphere in just a moment. We’ll chat about individual company names in just a moment. But I do want to take a moment here to thank our sponsor for the episode today. Let’s take a moment to consider the challenging times that we’re in we just mentioned, it’s been a crazy year out there. But the current economic climate has a lot of people wondering when will this ever end record high gas prices, volatility in the market, inflation and ongoing supply chain disruptions? Luckily, investors like you have Zacks investment research, which provides in depth financial data and expert analysis to help more strategic investment decisions be made. The feds doing all it can to cool down inflation and stocks have already started to respond. And when the market is gripped in pessimism, Zacks provides the invaluable resources that investors need to capitalize on volatility and to buy stocks when they’re low. They’ll also help you spot losers so you know which stocks to avoid or eliminate from your portfolio. experts know market volatility can unearth great opportunities. current conditions have done just that. So provide value to our listeners. Zacks is providing the opportunity to download their report five stocks set to double, absolutely free and with no obligation. Their experts are revealing the top five stocks with the best chance of gaining 100% or more in the next 12 months. Imagine how that could impact your portfolio or your retirement savings. So fight inflation and download your free report at Zach’s dot com slash seven investing podcast. That’s www.zacks.com/seven Investing podcast, a great reminder, Braden that it’s been a crazy year. But you know, I also want to tell them about stratosphere. That’s the company that you are the CEO of stratosphere.io. I’ve checked it out. I’m a big fan of your site as well, because it’s given a lot of financial information, but also key performance indicators that aren’t just price to earnings or price to sales ratios. You’re looking a lot at what makes these businesses tick. You think that’s going to be even more important next year, as you mentioned that it becomes more of a stock pickers market.
Braden Dennis 28:10
Yeah, so answer this in two ways. Like certainly one yes, it is what makes these businesses tick. And I’ll give you an example. So for Stratusphere are we we just closed a seed financing round and we have our monthly and investor updates. In my investor updates, I don’t provide them a you know, p&l income statement, balance sheet cash flow statement, it just doesn’t mean anything for the business. They want to know what’s our month monthly recurring revenue, how many users how many daily active users, what’s the like, kind of virality looking like how we can measure, you know, you share it here, you share it there. That’s what’s going to actually make my business tick. It’s not like, you know, GAAP profits and stuff like that, and public companies as big as they are. And I’ve talked about how important profits are for a lot of these companies. But it is not the derivation of their success. The easiest example to give is Netflix. Okay, Netflix, what had 37% single day drawdown when their q2 came out. It was their first ever net churn of subscribers. And there was a lot of impacts on that there was also the Russia factor as well. But it was the first time ever, that they actually had net negative subscriber ads during that quarterly period. And the stock got pummeled and revenue was 7%. Year over year for the for the second quarter up. And so how often is that? Does that happen? And of course, there’s a mix of guidance that came out on the quarterly For those saying, yeah, it’s gonna be a little tougher over the next 12 months. But the long term story remains, how often do you see a 250 billion in market cap company lose that much value in one single trading day. And it is actually, because of that metric net subscriber ads. And what makes Netflix’s business tick subscribers, it’s, that’s how they continue to grow the business and expand that operating leverage, because they spend around $17 billion on content creation. And they think that they can kind of sit there. So as they get more members over time, you get more and more operating leverage from those fixed costs that they that takes for, for creating all the content, all the Netflix originals. So there’s a perfect example of a business where a metric like net subscriber ads, and total premium subscribers for Netflix, and then now there’s going to be the ad supported users. And they all break those down. But gathering them all together is a gigantic pain in the you know what, and so we’ve tried to solve that problem by aggregating it in one place and doing it at scale. And so that’s, that’s our main mission is to is to gather that stuff, we give everything else out for free, and monetize that, because that’s why I think we’re saving a lot of people time, especially professional money managers who are getting their analysts to spend an entire afternoon to get give them. You know, AWS has run rate over the past 20 quarters. We want to, we want to solve that pain point of looking through PDFs all day. And so we are our thesis on this is that this is the stuff that really matters. For large companies, for small companies, for medium sized companies, public private, doesn’t matter. These are the metrics that actually move the business. More so than any regular income statement.
Simon Erickson 32:01
Prep. Well, we certainly love saving time. We also like looking out there for publicly traded opportunities. Let’s talk about three stocks that are on your radar right now, Braden and Bodis points because they’re based in Canada. And even more bonus points I’ll award to you if you can give me a couple of metrics or a couple of things that you think we should watch to figure out kind of what makes these businesses tick as well. First one is constellation software. This is a company you mentioned earlier in the program rolling up software companies out there.
Braden Dennis 32:26
Yeah, and they should mention, particularly on my radar, because I I own this one in size, you know, maybe it’s kind of always on my radar, because it’s such a gigantic piece of my personal public portfolio. But yeah, constellation software is a Toronto based roll up a vertical market software companies that is not a small company is well over 40 billion in market cap today. So we’re talking about a large cap company, but many people have not heard of it, unless you’re in the small corner of Twitter that is obsessed with it. Because it only trades on the Toronto Stock Exchange. And so, you know, for better or for worse, that’s the way that they’ve done it, they’ve always been very against a US listing a dual listing, like many large companies of that size will have a dual listing will have been on the TSX. And on the New York Stock Exchange, for example. And the reason businesses will do that is access to more investors and more capital. But they would prefer to have it less well known. And the reason for that is their bonus and structure for management. And the people who are doing these acquisitions in the m&a and all the operating groups, their bonus is actually tied to they have to use it to buy shares on the public market. And so it is a beyond unique incentive structure that is not common. You won’t see this very often. And so that’s one of the reasons that Mark Leonard, the founder and CEO is centered on only listing on the TSX. Now what does the business do? It’s about 800 ish vertical market software companies, very niche, what are called VMAs vertical market software companies. And we’re talking about mission critical, extremely boring, not growing extremely fast, but serve a very niche customer set. And ultimately very sticky. That’s kind of the main goal. They’ve pivoted their goal to a little bit more organic growth instead of net churn, but overall, these are value buyers. They’re not buying the hot AI tech company you and I were talking about. They’re buying boring payroll software for gymnastics clubs, like not sexy at all. But they think that there’s over 40,000 of them that they can roll up. And so the opportunity for them to continue to do that is Is there? How do you manage that many companies? Well, they have six unique operating groups that are managing a set of companies that are also operating groups. So you’ll have the mothership, the operating group, which is one of six, and then they might manage multiple companies that just do m&a, all the way down to the actual business unit of this niche, very niche company. And that’s really the only way to to do it is you need an octopus and all these different like their tentacles and all these different markets, in different languages in different regions in different industries. It’s the only way to do it at scale. And they’ve figured out how to keep scaling it not just like, keep going with, you know, the status quo, but actually accelerate and ramp up the amount of m&a activity that they’re doing. And some of the companies they’re buying are tiny, like really small like for I think they had a 440,000 annual run rate company that they bought like two quarters ago, like less than a million in sales, the types of companies that they’re buying. So it’s a it’s a very unique strategy. They’ve been experimenting with bigger acquisitions, carve outs, spin outs, and you can’t talk about them without talking about Mark Leonard, who is a gigantic unit of a man with this huge beard. And there are only two photos of him on Google. He is very unique human being and should be on more people’s radars is one of the best capital allocators that exists today.
Simon Erickson 36:44
Yeah, fantastic. We’re talking mergers and acquisitions. It’s all about the process. Great one constellation software. Let’s talk about another asset manager. This is more of a physical asset. So this Brookfield asset management change names change ticker recently here what’s going on with this upgrade?
Braden Dennis 37:00
Now, about every seems like every quarter, we have one of these moments where it’s like, how many tickers do they have? Which one did they just spin out, take public take private like it is this black box of financial wizardry. And it is. For the most part, if I was going to the name today, I would be like, I cannot possibly understand this complex structure. There are so many operating groups that are some of them are publicly listed. Some of them aren’t. Some of them they bought back last year, they’re spinning this one out this morning. Like As of recording today, it’s changing tickers. And you’re like, I’m so done with this. And I would also be so done with it. If Bruce flat the guy who’s been managing it for over 20 years now has not successfully compounded the business at over 17% CAGR. And they operate real businesses started real assets. And when I say real assets, I just mean like real estate, utilities, infrastructure, highways, toll roads, pipelines, these are the types of businesses that they own buy and also operate, as well as raise large pools of money for investors to get access to these types of assets. Because they’re alternative assets, they’re harder to get access to than if I go buy the public security. And so they have done some excellent things through the years. And now they have now spun off the asset manager as a pure play business because they’ve noticed that the asset management business, their competitors of these alternatives, have been given higher premiums than they think that they had the premium inside of the black box has been given. And so they’re willing to do this kind of stuff, if it’s going to unlock short medium term, long term value. They’re very incentivized to make shareholder returns great, like extremely incentivized, they want a ton of the company and the management team. And overall, they have a unique scale advantage because the raising capital for these assets, but also operating them, which is not a unique, I sorry, not a very common thing. It is unique in the way that they they raise capital and operate these assets. So it’s a management team that demands respect demands a gravitational pull through time and it’s also dual listed as well.
Simon Erickson 39:38
Yep. 70% compounded growth that’s fantastic over long periods of time, like you mentioned. And then last but not least, let’s talk about the sexiest company on the program. Here. We’re not talking about unsexy companies. I want to go back to the sexy ones here. That’s Shopify. This is one that kind of embraced software to help ecommerce you know, help come help retailers get established on the internet and have an online presence. What can you tell us about this one, and this is one that sold off a lot
the last year,
Braden Dennis 40:04
sold an awful lot and has come back quite a lot as well, which deserves some some note because it has really rallied quite well. And this goes down to what matters like what makes the business actually tick, and Shopify sigh huge drawdown because it was trading at absurd valuations, I will be the first to tell you that it made absolutely no sense where the price is trading. But today is that as true? Sure it’s still a frothy premium that you’re paying. But the stock is down tremendously. And during that time, over the last 10 years, you’ve had subscription solution revenue, because this is stuff we track on stratosphere.io of 38 point 3 million to one, almost one and a half billion over the last 12 months. Merchant solutions revenue has gone from 3.8 billion, trailing 12 months from just 12 million. That’s like 10 years ago, like we’re talking about hyperscale growth, they’ve spun up this business of payments volume, which is now doing like 100 billion in payments volume, gross merchandise volume, we’re talking about 190 billion, like the the scale of this business is remarkable 107 million on monthly recurring revenue from just 3.8 10 years ago. So Harley Tobey, the management team out of Ottawa, where they started this business, the capital of Canada has really done something exceptional in terms of being a category leader in an important emerging industry, which is, I want to sell something online, who’s the name and town to do it, there are all they have competitors. It’s not it’s not competitive free. But if you want to run the best e commerce platform, they have the brand trust and the ecosystem and the plugins to make their merchants have the best shot of success. It’s too big a risk to not use Shopify, if you want to do this e commerce builder. And so, you know, real category leader in E commerce stock got too expensive, saw a huge, huge massive drawdown, but the business is still executing. And if you’re tracking just a list of key performance indicators, like say, gross merchandise volume, monthly recurring revenue and the subscription solution and the merchant solutions before metrics, we could even go down to maybe just gross merchandise volume if you wanted to. That has performed far well and above anyone’s expectations. And so it should be rewarded. And it has been even though they’ve had this massive drawdown, zoom out and it has lapped the market many many times over. And we’re talking about phenomenal entrepreneurs kind of an accident story from trying to build a store to sell snowboards way back when from from Toby’s original founding story to now this giant public company that is known and loved all around the world. Now today. So goes back to what we’re talking about before where price drives narrative quite a lot. But if you focus on like the real business fundamentals, often there’s a different story and long term. Return decomposition is from business performance, not from multiples as much. You know, as you go further, further out the scale, you got like really short term, you have almost all of the performance on sentiment and multiples moving around and macro it pretty much every and it goes less and less and less and more towards business performance on this side of the scale as you go longer and longer down the time horizon. And so what’s the point of focusing over here? What’s the point of focusing over there? If it’s completely out of your control? It has no resemblance of your ability to analyze businesses. And long term is what you’re trying to do to compound your wealth over time anyways, so worrying on this side of this stuff, that scale just makes no sense to me.
Simon Erickson 44:18
Me either actually, you know, we there’s the Boston Consulting Group puts out the value creators index, you know, in the report that tracks long term performance and like you mentioned, it’s about business fundamental performance and top line revenue growth over a 10 year periods, the valuation multiples, they wash away, they can be hot one year and not as hot the next year. But fundamentals endure over long periods of time. I certainly agree. And my goodness, it is so refreshing to chat with you, Braden about long term investing and in the fundamentals, you know, a couple of companies for people that wanted to follow along these Canadian companies with great fundamentals mentioned constellation software that is csu.to is the ticker for that Brookfield asset manager I believe it be in now Braden is that the new ticker as of this morning is that
Braden Dennis 45:02
right? As of this morning Brookfield Corp is now b n and what used to be Bam is now its own ticker the asset management business I know it’s making sure even shareholders is a struggle like don’t worry if you’re listening you’ve never heard of this county before even shareholders have to every once in a while check in on the structure of all the public ticker so don’t worry,
Simon Erickson 45:27
Brookfield Brookfield now be in for Brookfield Corp. Of course Shopify got that one. Right. That’s sh O P for shots. If you’re looking for three for your radar, I want to get Braden Dennis, you know, is the host of the Canadian investor, also the CEO of stratosphere.io. It’s a business that website that I use personally, I’ve been a big fan of it. Braden, really fan of your work. Thanks for being a part of our seven investing podcast here today talking about long term investing.
Braden Dennis 45:51
Thanks so much. And I should add disclosure, I own all three of those tickers that were mentioned. I’ve owned all of them for a very long time. And so you cannot borrow my conviction. And that’s why this should only ever be the start of of research and digging into the business. Thank you so much for having me, man. This has been really fun.
Simon Erickson 46:14
Absolutely. And thanks, everybody for tuning into this edition of our seven investing podcast. We are here to empower you to invest in your future. You can learn more at seven investing.com. Thanks very much for tuning in. Hope you have a great weekend. We’ll see you next time.
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
Anirban and Matthew were joined by Alex Morris, creator of the TSOH Investment Research Service, to look at seven former market darlings that have taken severe dives from...
On episode 5 of No Limit, Krzysztof won’t let politics stand in the way of a good discussion - among many other topics!