News and Insights

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2023

December 20, 2023
Martin Pradier of Veritas warns that world has too much copper

Martin Pradier, our Materials Sector Analyst, joined BNN Bloomberg's Andrew Bell to discuss how China's residential real estate slump is likely to drag on for years, pushing down copper prices and creating a global surplus in 2024.
"If you look at the last 25 years, there was no growth for copper outside of China," Martin said, adding that China used to consume 7% of the world's supply of copper but that is now up to 57%. Out of that, China's real estate accounts for about 25% to 30%. "China's consumption is eight times bigger than the U.S."
"We've seen in China that housing initiations are down 60% from 2021's level. Eventually, that will hit copper demand quite significantly," he said, explaining that adding copper wiring is one of the last steps in construction before a building is completed, usually two to three years after the first hole is dug.
The average person in China has been investing in real estate over the last couple of decades due to a lack of opportunities for other investments, and it has been a good investment as prices went up 8% to 10% annually. However, it has led to excess development and real estate developers defaulting on loans as interest rates rocketed higher and the government implemented new regulations. 
There is a crisis of confidence as people don't know if they will lose their down payments (30% to 50% on new apartments) or if those homes will ever get built, he said. 
Housing booms also usually take years before the market recovers, Martin said, noting examples of the U.S. after 2007 and Japan after 1995, as both markets are still building fewer homes than at those peaks. 
Copper prices also rose 3% in 2023, but costs for copper miners rose 16%, indicating that copper has already been in a surplus because if there was higher demand then producers would have passed along cost increases to customers. 

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December 18, 2023
Persistence Capital Partners cuts buyout offer for Neighbourly Pharmacy

Kathleen Wong, our Senior Investment Analyst for the Consumer Staples & Consumer Discretionary Sectors, was quoted in this Globe & Mail article about Persistence Capital Partners (PCP) reducing its offer for the remaining 49.8% it doesn't already own of Neighbourly Pharmacy Inc. (TSX: NBLY).
PCP reduced its offer to $18.50 per share from $20.50 per share, blaming difficult market conditions and the view of its financing partners.
"We disagree with PCP's comments about difficult market conditions," Kathleen said, noting that interest rates have stabilized and are expected to go down next year, which would reduce borrowing costs.
Kathleen calculates that $18.50-$20.50 equates to 12x-13x EBITDA, which is lower than NBLY's IPO multiple of 13.4x EBITDA in May 2021. Since then, the company has doubled its stores and sales.
She provided additional commentary to clients this week arguing that NBLY deserves to be valued at a much higher multiple than the 11x-14x EBITDA of the latest drugstore acquisitions (Loblaw's acquisition of Shoppers Drug Mart at 11x, McKesson's acquisition of Rexall at 13x and Metro's acquisition of Jean Coutu at 14x) because it has a lot of room to grow in the highly fragmented Canadian drugstore industry, with 3,500 independent pharmacies that fit its acquisition criteria. 

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December 13, 2023
Constellation Software is well positioned to capitalize on M&A

Up ~56% year to date and ~230% over the past five years, Constellation Software Inc. is a Canadian success story, but also one of the more unusual companies in Canada. Desmond Lau, our Senior Investment Analyst of telecom and technology, joined BNN Bloomberg with host Amber Kanwar to discuss Constellation and its outlook for next year. 
The conversation started out with Amber asking if Constellation is the Berkshire Hathaway of software companies.
"There are similarities. The management team is very disciplined at Constellation Software," Desmond said, adding that Constellation is not like other companies, in that it doesn't do quarterly conference calls with analysts, doesn't give out earnings guidance or pay stock options as part of its executive compensation. "Constellation has trained shareholders to think over the long term."
Desmond also talked about the company's unique strategy of spinning out subsidiaries and using spun-off stock to make acquisitions. Both the Topicus spin-out in 2021 and the Lumine spin-out this March have unlocked value.
Although Constellation is trading near Desmond's intrinsic value, he continues to have a BUY recommendation.
"We think Constellation can continue to compound. If they keep making acquisitions and keep growing their cash flows, in five years, they will be much bigger than they are now."

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November 28, 2023
Franco Nevada analyst on Panama Court ruling against First Quantum

Martin Pradier, our Materials Analyst, joined BNN Bloomberg to discuss the impact of the shutdown of the Cobre Panama mine on Franco-Nevada Corp. "It's their single biggest holding. The reality is that now we're going into a situation where First Quantum (owner of the mine) will sue the government of Panama, and they'll go to an arbitration court that will take time. In the meantime, there will be a new president of Panama. You're looking at years before something is resolved."

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November 27, 2023
Why a soft landing could be bad for Canada's big banks

Nigel D’Souza, our Senior Financial Services Analyst, talked with the Financial Post’s Larysa Harapyn about why a ‘soft landing’ economic slowdown could spell trouble for banks as Canada’s major financial institutions start to report fourth-quarter earnings on November 28.

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November 23, 2023
Canadian producers don't need US$100 oil to succeed: analyst

Dan joined BNN Bloomberg's Amber Kanwar this week to discuss how Canadian oil producers have been outperforming U.S. peers despite the fall in oil prices.
As Dan said in the interview, "If there's one thing we learned in Q3, it is that Canadian oil producers don't need US$100 oil to make money. They don't need a heavy-diff at $5 or $10 to generate significant cash and therefore significant shareholder payouts."
He has a BUY on the four oil sands majors, noting that each one has a different investment appeal. He favours Canadian Natural Resources Ltd. as a model of consistency and one of the best capital allocators in the business, while Suncor Energy Inc. is a turnaround story. Imperial Oil Ltd. is a shareholder yield story, while Cenovus Energy Inc. is a business model transition story of diversifying into refining. He also discussed Tourmaline Oil Corp. as a free cash flow growth story. TOU is also a BUY.

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November 22, 2023
Canada’s Biggest Bank Is Trying to Fix Its $10 Billion Headache

Nigel D'Souza, Our Senior Financial Services Analyst, was quoted in this Bloomberg feature about how Royal Bank of Canada (NYSE/TSX: RY) has had to inject billions of dollars into its U.S. bank, City National, including US$2.9 billion this year.
As Nigel explained, City National's focus on high-net-worth clients has made it especially vulnerable to forces sweeping the U.S. regional banking sector this year as interest rates rose. A whopping 72% of City National's deposits by the end of 2021 were above the US$250,000 threshold for federal insurance. Over the next year and a half, many of those wealthy clients would take their money elsewhere for better and safer returns.
Earlier this year, Nigel argued for the sale of City National. Now, he doesn't think it would fetch more than its 2015 price, leaving Royal Bank faced with trying to improve its profitability after cleaning up its balance sheet.

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November 22, 2023
How Tracy Robinson got CN Rail back on track

Tracy Robinson, CEO of Canadian National Railway (NYSE, TSX: CNR), was named CEO Newcomer of the Year in ROB Magazine's annual CEO awards. In a feature about her and CNR, Dan said strategic changes under Robinson have put the railway in a better position to drive profitability.
"They have, to my mind, righted the ship. Operationally, they've made all the right moves." The changes have yet to do much for CNR's stock, but Dan says that has more to do with macroeconomic uncertainty than doubt about CNR.

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August 25, 2023
RBC downgraded amid higher expenses, 'unfavourable' deposit trends

Our Financial Services Senior Analyst, Nigel D'Souza, downgraded Royal Bank of Canada (NYSE, TSX: RY) to REDUCE after Q3-F23 results, as reported by BNN Bloomberg. Despite the downgrade, he still holds a favourable view of RBC's fundamentals and expects the bank to outperform its peers in the long run.
“We are downgrading RY to reduce on a downward revision to our outlook for net interest income growth with unfavourable deposit trends continuing to pressure funding costs and higher non-interest expenses weighing on operating leverage,” he wrote in a report to clients. 
“We prefer to see a material reduction in expenses and a stabilization in funding costs before turning more bullish on RBC's near-term outlook,” he added. 

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August 23, 2023
We expect lower loan growth in the upcoming results: Bank earnings preview

Nigel D'Souza, our Senior Financial Services Analyst, joined BNN Bloomberg to discuss why investors should look past the headline numbers to areas of concern for the Canadian banks.
"I think what everyone is going to be paying attention to is the net interest margin and what is happening on the funding cost side," he said. "There is a lot of funding pressure at the moment." In Canada, depositors are moving their money from lower-yielding demand and notice deposits (chequing and savings accounts) to term deposits (GICs). That's going to increase funding costs in Canada for the banks.
"This quarter, we're going to be paying attention to loan growth, credit losses and what the outlook is more so than what the results are this quarter," he added. "And also the prospects for whether the banks can actually maintain their margins and grow earnings because I don't think a lot of the downside risk for earnings in 2024 is currently reflected in consensus estimates."

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June 23, 2023
Investing Like a Forensic Accountant

Ben Graham Centre's 2023 Value Investing Conference has put the replay of our President and CEO Anthony Scilipoti's keynote speech at its spring conference on YouTube. In the presentation, Anthony talked about how he and his partners started Veritas 23 years ago and how Veritas disrupted the capital markets business by convincing investors to pay for independent investment research.
He also explained the Veritas framework for forensic accounting and examples of some of our best work over the years that helped our clients avoid significant losses.
As he said, the Veritas forensic accounting process for identifying risks and opportunities involves paying attention to the details and looking for "flammable items." 
"All these little things that we consider red flags, or maybe yellow, all of them mean nothing until there is a spark," he said. "We never know what the spark is going to be. It could be a tweet from Hillary Clinton. It could be a report from a crazy short seller. It could be a change in regulation from the government. It could be the economic change and shift that we're experiencing right now."
Veritas Flammable Items Watch List:
•  Changes in financial communication;
•  Changes in internal control structure/dynamics;
•  Changes in non-GAAP metrics;
•  Changes in accounting assumptions/estimates;
•  Changes in economic or competitive dynamics;
•  Unusual divergence between financial and operational performance;
•  Unusual divergence in business strategy.
"I think the timing is interesting now as we're entering a period with a lot of volatility and uncertainty in our economic cycle," Anthony said. Low interest rates for the last 30 years led to a rise in asset values and covered up a lot of problems in businesses, but that period has ended as we deal with stubborn inflation and interest rates that will likely stay higher for longer. "Now is the time to do additional due diligence." 

You can also download the slides.

Replays for the other speakers are also available on the conference website, including legendary value investor Howard Marks (we wrote about his talk in our News and Insights newsletter in April - here is Anthony's LinkedIn article about what he heard).
Dr. George Athanassakos, Founder & Managing Director, Ben Graham Chair in Value Investing, Ivey Business School and conference organizer, has also been a guest on our Fact Finder series. You can find the replay on YouTube: Contrasting Modern Portfolio Theory and Value Investing - With Dr. George Athanassakos - Episode 89.

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June 20, 2023
Higher 'DSB' means smaller dividend increases for banks: Analyst

The Office of the Superintendent of Financial Institutions this week announced a 50 bps increase to the domestic stability buffer (DSB) to 3.5%, increasing the minimum CET1 ratio requirement for Global or Domestically Systemically Important Banks (G-SIBs or D-SIBs) to 11.5%. 
OSFI cited elevated and rising systemic vulnerabilities, including rising interest rates, home prices that are climbing again, and elevated household and corporate leverage as reasons for the higher buffer. 
Our Financial Services Senior Analyst, Nigel D'Souza, was on BNN Bloomberg to provide his take on what this means to investors in Canadian bank stocks. 
All the Big Six banks already have sufficient capital set aside to comply with the new buffer, so they won't need to raise more capital. But what the higher DSB will do is constrain the ability of the banks to increase dividends and buy back shares.
"We're at a stage where the banks are a little more capital conscious and want to preserve their capital," he said. "We're already at that part of the cycle where banks are more restrictive on lending. There is a reduction in the willingness to lend, but on the other side of that, due to the increase in interest rates, the demand for loans is also in decline."
Nigel also discussed how he expects banks' earnings to come under increasing pressure.

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June 12. 2023
Analyst Actions: CN Rail is seeing unreasonably low growth priced in

Dan Fong, Senior Investment Analyst for Diversified Industrials & Energy, was on BNN Bloomberg discussing his outlook for Canadian National Railway (NYSE: CNI, TSX: CNR) and a recent controversy that has made headlines about a new federal government proposal to expand interswitching. 
Interswitching is a regulatory mechanism that allows railway shippers in sole service areas in Canada to request the use of another railway company's lines and services to transport their goods. It is a form of competitive access that promotes competition in the railway industry by providing shippers with more options and potentially lower costs.
However, as Dan explained, interswitching is complex and does not always lead to lower costs and better service. 
"It's not as simple as dropping off a few cars and getting them picked up, loading up that freight and driving on," he said. Often, the cars that need to be dropped off are in the middle of the train, which causes multiple disconnects and reconnects, causing delays and increasing costs. "The more you handle those cars, the higher the cost. Also, in many cases, those cars don't get picked up right away. They'll often sit at a junction point for days or weeks waiting to get picked up."
As for CN Rail's outlook, Dan remains concerned about near-term economic weakness and shipping volume declines. 
"But for long-term investors, we think there is an opportunity," he said. "The current price of CN Rail looks like it is discounting an unreasonably low growth rate. By our estimates, we think the market is baking in a three-year compounded earnings growth rate of about 5% to 6%. But if you look back over the last 17 to 18 years, CN's average three-year CAGR has been about 10% to 12%."

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May 28, 2023
Canada’s big banks log 13-fold rise in loan loss provisions

Our report on long-term investing in Canada's Big Six banks was also featured in The Financial Times. 
“Canadian banks generate higher [return on equity] and trade at higher book multiples than US banks,” The Financial Times wrote, quoting the report (see more about it below). “Since 1840, Canada has not experienced a bank crisis, and only two banks have failed since 1923 . . . The US banking system, on the other hand, has experienced 12 major banking crises since the 1840s.”

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May 25, 2023
Canadian banks bent on international expansion lag those that stay home, Veritas report argues

Our report on long-term investing in Canada's Big Six banks was featured in The Globe & Mail. As The Globe article lays out, the report offers a counterblast to the conventional wisdom that insists foreign acquisitions are the only way for Canadian banks to achieve significant growth.
In the report, entitled “The Tortoise and the Hare,” Senior Financial Services Analyst Nigel D'Souza and his Associate Analyst Roshun Paunikar argue that “slow and steady” wins the race in Canadian banking. Published at the beginning of May, the report concludes that the banks that generated the best risk-adjusted returns over the past decade were the “tortoises” that focused on Canadian banking rather than the “hares” that raced out to pursue international diversification.
Both Royal Bank of Canada (NYSE, TSX: RY) and National Bank of Canada (TSX: NA) have grown their share prices faster than their peers over the past 10 years, “which we attribute to each bank’s focus on growing earnings from Canadian banking, wealth management and capital market franchises.”
Since 2018, the Big Six banks have enjoyed a return on equity of 34.7% in their Canadian banking operations versus a mere 12.5% in their international banking activities, Nigel calculated.

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May 23, 2023
Gearing up for Canadian bank earnings

Nigel D'Souza, our Senior Analyst for Financial Services, joined BNN Bloomberg to discuss his outlook for Canada's Big Six banks, which are reporting their Q2-F23 quarters this week.
One major talking point this week will be funding costs, Nigel said. In Canada, it is about a fight for deposits as bank customers shift money away from savings accounts and into higher-yielding term deposits and GICs. In the U.S., it is a deposit flight as bank customers switch their savings to systematically important banks in the wake of the regional banking crisis or to higher-yielding money market funds. Both the fight and flight will increase lending costs and pressure margins for Canadian banks.
Nigel also discussed his long-term thinking on which bank stocks are best to own, as he has a Reduce rating on Bank of Nova Scotia (NYSE, TSX: BNS) and Toronto Dominion Bank (NYSE, TSX: TD) and a Sell rating on Canadian Imperial Bank (NYSE, TSX: CM) and Bank of Montreal (NYSE, TSX: BMO). He has Buy ratings on Royal Bank of Canada (NYSE, TSX: RY) and National Bank of Canada (TSX: NA).
"Longer-term, I think that banks that focus on Canadian banking, like RBC and National Bank, are going to outperform banks that chase international banking growth, like BMO, Scotia, TD, and even now CIBC with its entry into U.S. commercial banking," he said, referring to an industry report he published last month for our clients in which he found that Royal Bank and National Bank outperformed on shareholder returns over the long-term by focusing on stable and less risky Canadian banking, wealth management and capital markets. U.S. banking typically has higher credit losses in a recession and a greater risk of banking crises over the longer term, he noted.
"As for where we are now in the cycle, I think we're closer to the floor for Canadian bank stocks than the ceiling but the floor is probably 12 to 18 months out on the horizon."

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May 15, 2023
Why Newmont's Deal for Newcrest May Not Pan Out

Our Materials Analyst Martin Pradier was on BNN Bloomberg to discuss Newmont Corp.'s (NYSE: NEM, TSX: NGT) proposed acquisition of Newcrest Mining Ltd. (TSX: NCM) now that Newcrest's board backs the deal.
He continues to have doubts that the deal will be accretive for shareholders. "They're paying a 30% premium, and normally it is difficult to be accretive when you're paying such a big premium," he said. 
Martin pointed out that Newmont's stock has not performed well against peers since the deal was announced, so the most significant source of resistance to the deal may come from Newmont's shareholders. The deal still needs to be approved by shareholders of both companies and various governments.
Martin is the only analyst on the Street with a SELL rating on Newmont, according to Refinitiv. 
"The biggest problem with Newmont has been on the cost side," he said. If you look at the last five years, gold prices have gone up about 42%, and the cost per ounce at Newmont is up about 38%, so shareholders have yet to benefit from the leverage of rising gold prices. 
"They should have done much better than that," Martin said. "If you look at even the last quarter, costs were up 15% year over year."

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May 1, 2023
TFI International: Freight Volumes & The Economy

Dan Fong, our Senior Investment Analyst for Diversified Industrials & Energy, joined BNN Bloomberg to discuss TFI International Inc. (NYSE, TSX: TFII) and its acquisitions of two entities, Siemens Transportation Group and Hot Line Freight Systems. He also discussed the outlook for the freight and transportation industry.
TFI is known as a successful and active acquirer. "[These deals are] a good example of using its clean balance sheet and its strong M&A program to continue building scale in the Canadian  LTL [Less-Than-Truckload] market," he said. "If the market starts to weaken, I think you're going to see a lot of opportunities to pick up a couple of tuck-in acquisitions here and there to continue advancing that program."
However, Dan is cautious on TFI and the sector in the near term, saying declining freight volumes across the sector are a leading indicator that the economy is slowing.
TFI recently reported Q1-F23 results and lowered guidance for the year. 
"What we're hearing from across the entire freight and transportation complex right now is that volumes are coming under increasing pressure," Dan said. Six or seven weeks ago, the expectation was that the first half of the year would be weak, but there would be a recovery across the sector in the second half of the year. "Q1 volumes came in relatively weak, and what we're hearing is reports of double-digit declines in April. Now companies are saying that softness they see today may continue and persist into Q3 and Q4."

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April 19, 2023
Ben Graham Centre's 2023 Value Investing Conference

Our President and CEO, Anthony Scilipoti, opened the Ben Graham Centre's 2023 Value Investing Conference. Amongst many great speakers, Howard Marks, the famed value investor, co-founder and co-chairman of Oaktree  Management, was the most internationally recognized speaker. Here is an article that Anthony wrote on LinkedIn containing his notes on Howard Marks' talk, plus a few points from Anthony's presentation: Key Takeaways from the Value Investing Summit. 
Howard Mark's comments tie nicely with one of the main points of Anthony's presentation, Investing Like a Forensic Accountant, and that is that the sea change will put increasing pressure on companies to meet Street expectations, which means that investors need to be on high alert for accounting shenanigans. 
As also noted in this Globe article about the conference (Value investing may finally be emerging from its decade-long slump), at Veritas we think the sudden move higher in interest rates is poised to unsettle many sectors that have prospered from the steady fall in rates over the past four decades. Be wary of highly indebted companies, alternative-asset managers, and banks, as they are more likely to feel the pinch of higher borrowing costs.
The article's author, Ian McGugan, couldn't have said it better: "The most valuable investing decisions of the next couple of years could have more to do with what you choose to avoid than what you choose to buy."

April 12, 2023
Outlook for Canadian banks amid BoC rate pause

Our Financial Services Analyst, Nigel D'Souza, was on BNN Bloomberg following the Bank of Canada's decision to hold interest rates steady. He discussed which of the Big Six banks should do better with higher interest rates, but noted that this should be balanced by the fact that the banks will also be facing higher credit losses the longer rates stay high.
He also discussed the U.S. regional banking crisis and how he doesn't expect any of the Canadian banks to face similar liquidity issues or deposit outflows. "That dynamic is not one we expect to play out for Canadian banks." 
A bigger risk will be the broader impact of weaker loan growth and credit contraction in U.S. banking. That will affect Bank of Montreal (NYSE, TSX: BMO), Toronto Dominion Bank (NYSE, TSX: TD) and Royal Bank of Canada (NYSE, TSX: RY) the most as they have significant U.S. operations. 
Nigel also discussed how it may not be a bad thing if TD's acquisition of First Horizon Corp. doesn't go through, as it may give TD a chance to let the dust settle in the U.S. banking sector to assess profitability and other opportunities.

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April 11, 2023
Newmont's offer for Newcrest Mining will destroy shareholder value if accepted: Analyst

In the wake of Newmont Corp.'s (NYSE: NEM, TSX: NGT) increased bid for Newcrest Mining Ltd. this morning, our materials sector analyst Martin Pradier continues to think the US$19-billion acquisition will prove to be value-destroying for Newmont shareholders.
"[Newmont is] paying too much," Martin said on BNN Bloomberg. "Don't they have better assets to develop? Do they really need to pay a 50% premium? This is a big deal. If you buy a little company, you can get a more reasonable value, and maybe that asset is really good, and you can develop it and justify it. But this is a very big company they are trying to buy."

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April 10, 2023
Utilities will outperform as economic risks start to mount again: Darryl McCoubrey

The utilities sector has outperformed the S&P/TSX composite index so far this year, as investors, worried about a recession, are more risk averse. 
Darryl McCoubrey, our Head of Research and Utilities and Infrastructure Analyst, was on BNN Bloomberg to discuss his recommendations on the sector. He talks about his positive outlook for ATCO Ltd. (TSX: ACO), Canadian Utilities Ltd. (TSX: CU) and Fortis Inc. (TSX: FTS).
"Fortis doesn't generate as much cash flow today, but its growth prospects are really strong," he said. "It has one of the highest allowed ROEs (return on equity) across its portfolio and has one of the highest growth trajectories for its dividend."
He also discusses why he wouldn't buy Emera Inc. (TSX: EMA) and talks about how carbon capture projects may impact the sector after the federal budget.

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April 1, 2023
Green For Life’s founder built a garbage empire on $9 billion in debt. Now interest rates are rocketing up — is he worried?

GFL Environmental Inc. has been on a steep growth trajectory, buying dozens of companies and expanding to all 10 Canadian provinces and 26 U.S. states over the past 15 years.
But as this Toronto Star article outlines, GFL has accumulated $9.68 billion in debt along the way, more than six times its EBITDA of $1.6 billion, a ratio that is about twice the industry average.
As quoted in the article, Darryl McCoubrey, our Head of Research at Veritas and Utilities and Infrastructure analyst, wonders if the desire for growth could hurt the company in a potential recession, especially given the company's high levels of debt and interest rates that are higher now than they have been in GFL's lifetime.
"They bring businesses on at a low margin and tend to improve them over time, and ameliorating poor businesses becomes risky in a recession scenario," said Darryl  "In a recession, people produce less waste, and the whole industry suffers, and GFL, who has more leverage and M&A embedded into their strategy, could be impacted disproportionally."
And yet, he added, people produce waste no matter the economic climate -- and that could shield GFL from collapse. "That's what makes GFL unique: they have a risky strategy built onto a safer-than-safe asset."

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February 27, 2023
Canadian bank earnings: Nigel D'Souza

Nigel D'Souza, our Senior Analyst of Financial Services, joined BNN Bloomberg's Amber Kanwar to preview Canadian bank earnings for the first quarter of 2023.
Nigel talked about his ratings on the banks in an environment where interest rates are 'higher for longer' and why he thinks this will benefit National Bank Financial (TSX: NA) and Royal Bank of Canada (NYSE, TSX: RY) the most. 
As Nigel explained, his analysis focuses on risk-adjusted margins, or the net interest margin after accounting for credit losses. National Bank's risk-adjusted margin should outperform because of its concentration in Quebec, which tends to have lower credit losses. Royal Bank's risk-adjusted margin should outperform because of lower deposit betas which will drive net interest margin expansion.
He also discussed the other banks and the Canadian housing market.

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February 24, 2023
Accounting Summit with the IASB

This was a short Accounting Alert report that we sent to our clients. We thought more investors would appreciate the update so we decided to share it widely. 

Please enjoy complimentary access and feel free to share with others.

By Anthony Scilipoti and Dimitry Khmelnitsky

Earlier this month, senior members of the International Accounting Standards Board (IASB), the Canadian Accounting Standards Board, and securities regulators, met informally with a number of Canadian professional investors for an open forum at our Veritas offices in Toronto. From the side of the investors, there was an overriding sense of concern that accounting standards have lost relevance with their intended audience because of the increasing complexity of GAAP financial information. That complexity has manifested itself in the prominence of non-GAAP metrics in place of audited GAAP results and the growing market share of private over public investments. 

Please see full the report for a summary of the discussion about non-GAAP metrics, excessive accounting standard changes, unintended consequences of Fair Value accounting, and sustainability accounting.

Read the report: Accounting Summit with the IASB

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February 24, 2023
'Holding ourselves accountable': Tim Hortons' parent RBI to start releasing earnings per restaurant

We are often critical of companies that do not provide enough quality disclosure about their financials. It usually means they're hiding something they don't want investors to know about.
At the same time, it's important that we take the time to appreciate it when companies provide new and improved disclosure.
The Financial Post recently wrote about how the new executive chairman at Restaurant Brands International Inc. (NYSE: QSR) is going to release EBITDA per restaurant for each of the company's four major brands in order to "elevate accountability to our franchises even further."
Kathleen Wong, our Senior Investment Analyst for the Consumer Staples and Consumer Discretionary Sectors, said restaurant EBITDA is the best metric for investors to evaluate management’s execution of its strategy.
“EBITDA per restaurant for each of the four brands allows us to calculate the return on investment or cash-on-cash return for each brand,” Kathleen said in an email, noting that the investment cost at Tim Hortons is different than at Burger King or Popeyes. 

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February 17, 2023
Quebec’s Lion Electric Co. transforming an industry by cranking out electric school buses

The Globe & Mail recently wrote a long feature about The Lion Electric Company (NYSE, TSX: LEV), in which Veritas Special Situations Analyst Brent Levenstadt is the only outside analyst quoted in the article with concerns about fundamental weaknesses in the business, including high turnover and a deal with Amazon that is “good marketing, but doesn’t yet appear to be a long-term profitable supply agreement.” 
The article doesn't discuss Brent's much larger concerns that he has communicated to our clients since initiating coverage last summer, namely that the Street's estimates are too high, the company burns too much cash, and that disclosure around its order book should be met with caution.
 

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February 11, 2023
Swimming against Brookfield’s tide of positivity

Dimitry Khmelnitsky, our Head of Accounting & Special Situations, remains the lone analyst with a Sell on Brookfield Asset Management Inc. (NYSE, TSX: BAM) and a Reduce on the parent, Brookfield Corp. (NYSE, TSX: BN).
As this Globe & Mail article lays out, the remaining analysts on the Street rate the two Brookfield entities as either a Strong Buy, Buy or Hold.
In the article, Dimitry said Brookfield has an impressive track record, but the past is not always prologue. Over the past two decades, Brookfield rode a continuing fall in interest rates that encouraged the shift toward leveraged bets on alternative investments. Now, with interest rates at higher levels, potentially for a while, that logic could go into reverse.
“Management’s forecast of more than doubling fee-related earnings over the next five years, unveiled during 2022 Investor Day, may be optimistic given the negative impact of rising rates and falling asset values,” he wrote in a report to our clients last month.

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February 8, 2023
We prefer Manulife Financial ahead of a recession: Analyst

Nigel D'Souza, our Senior Analyst for Financial Services, was on BNN Bloomberg ahead of Canada's main insurance companies reporting Q4-2022 results.
He rates Intact Financial Corp. (TSX: IFC),  Great-West Lifeco Inc. (TSX: GWO), Manulife Financial Corp. (TSX: MFC) and Sun Life Financial Inc. (TSX: SLF) all at Reduce. 
For Intact, his concern is that the company benefited from lower insurance claims during the pandemic, especially in its auto division, but claims are now normalizing at the same time the inflation is driving up insurance repair costs. 
Although Manulife is a Reduce as well, he favours it over Great-West and Sun Life because Manulife has a larger weighting to insurance segments, while the other two are more weighted toward wealth and asset management. 
"We think you're going to see more stability in Manulife's earnings, and that's the stock in the insurance space we would prefer to own going into a recession," he said, adding that the only reason he has a Reduce on Manulife is that it rose above his valuation.

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February 6, 2023
Barrick Gold is a better option to own than Newcrest

Martin Pradier, our Materials Analyst, was on BNN Bloomberg with host Andrew Bell to discuss Newmont Corp.'s US$16.9 billion bid for Newcrest Mining Ltd., saying another bidder is possible.
He also suggested that there may not be many synergies between the two companies. "Newmont is already the largest gold miner in the world. Having an extra division or a few mines more, will that make a big difference? I'm not sure," he said. "When you're buying a company at a big premium, [at a 20% premium, and it could be more], are you creating value for the shareholders?"
Before the bid was announced, he rated Newmont a SELL on its valuation and an upcoming material impairment that the company plans to announce in its Q4-F22 results. He thinks Barrick Gold Corp.'s CEO made a good decision in saying he won't pursue a bid for Newcrest. "I don't want them [Barrick] to just do deals and just try to buy other companies. I would much prefer them finding new gold deposits and making money for shareholders that way."
He also discussed why his top pick is Agnico-Eagle Mines Ltd. and the outlook for gold this year.

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February 1, 2023
Big Three grocers have new appeal in recessionary environment

As this Globe Advisor article laid out, the Big Three Canadian grocers have performed well since the pandemic for investors, but with inflation running high and a recession looming, will the strong performance continue? 
Kathleen Wong, our Senior Investment Analyst for the Consumer Staples & Consumer Discretionary Sectors, is quoted in the article as saying that she favours Metro Inc. (TSX: MRU) in this environment.
She argues that Metro's discounting strategy is well-positioned as consumers look for more value in a recession. Metro uses its exclusive partnership with U.K.-based Dunnhumby, a data analytics company, to target weekly specials strategically to drive traffic to its stores. 
Loblaw Companies Ltd. (TSX: L) may have more discount stores (47%) versus Metro (24%), but Loblaw has a wider exposure to a weaker economy through its Joe Fresh general merchandise unit and credit card operations, she said.

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January 25, 2023
If your bank accentuates the positive, bad news may follow

We have a saying around here at Veritas, 'The details matter.'
As David Milstead at The Globe & Mail wrote this week, buried deep within the securities filing of Canadian banks are their forward-looking economic indicators for GDP, unemployment and housing. Each bank must provide a benign case, base case and adverse case for each economic indicator.
The banks use those indicators to forecast losses on performing loans, also called their provisions for credit losses (PCLs). The banks actually use much more sophisticated models to forecast PCLs, but this is as much as shareholders get to see.
Our Financial Services Analyst, Nigel D'Souza, tracks these indicators quite closely for our clients and it helps him predict how hard the banks are going to get hit with credit losses on performing loans in the future, or vice versa.
In other words, if a bank was too optimistic and the economy worsens, then PCLs may have to escalate down the road, and shareholders will take the hit. It works in reverse too. When the outlook is too pessimistic, Canadian banks could reverse PCLs down the road as they did at the end of the pandemic.
The banks often have very different forecasts quarter to quarter and the article walks through some of those differences, highlighting that Nigel thinks the Bank of Nova Scotia (NYSE, TSX: BNS) may need to set aside more money if the economy tumbles. A 100% weighting to Scotiabank’s “very pessimistic” scenario – a step below its adverse scenario – a step below its adverse scenario – would result in a $1.1-billion increase in allowances for performing loans.

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January 17, 2023
Why Hydro One’s shares are soaring despite rising rates and constant CEO upheaval

Darryl McCoubrey, our Vice President and Head of Research, Partner, Utilities & Infrastructure Analyst, was quoted in The Globe & Mail explaining why Hydro One has long been one of his favourites.
Hydro One is what analysts call an “all-weather” stock, the article said, and it has the perfect ingredients for these chaotic times: Ontario’s electricity regulator permits rate hikes to counter cost inflation; the company has a sound balance sheet with very little variable rate debt; and the utility is now solely focused on its home province, so it does not have risky expansion plans that might put investors on edge. It’s steady as she goes, and shareholders are eating it up, the article said.
“They’re ticking the checkmarks that you want checked from a regulated utility,” Darryl said. “It’s income first.”

Hydro One has been on our Veritas V-List of top picks since July 15, 2019, providing a total return of 81% over that time, versus 37% for the S&/TSX Composite Index and 34% for the S&P/TSX Capped Utilities Total Return Index.

Contact sales for information on how to subscribe to our Veritas V-List.

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January 16, 2023
Barrick Gold before Mark Bristow had trouble as a stock: Analyst

Martin Pradier, our Investment Analyst for Materials, joined BNN Bloomberg to discuss the outlook for gold and major gold mining companies Agnico Eagle Mines Ltd. (NYSE, TSX: AEM), Barrick Gold Corp. (NYSE: GOLD, TSX: ABX), and Newmont Corp. (NYSE: MEN, TSX: NGT). 
He discussed how gold in U.S. dollars has risen 7% on average over the last 50 years. Last year, it performed below average but it still did better than most equity markets.
"In general, gold does very well in a recession and in the months before a recession, because it doesn't fall as much as the other assets, he said, explaining that it remains a useful tool for diversification. 
He also explained why he likes Agnico-Eagle and Barrick over Newmont.

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2022

December 22, 2022
Brookfield Unit’s Rough Start Looks Like an Opportunity to Goldman

Dimitry Khmelnitsky, our Head of Accounting and Special Situations, provides an alternative take to Goldman Sachs's opinion on Brookfield Corp. and its recent spinoff Brookfield Asset Management Inc. in this Bloomberg article.
“BAM benefited significantly and grew massively in very large part, in our opinion, due to ever-declining interest rates that enabled them to attract more and more capital,” he said. Khmelnitsky sees rates as a bigger problem for alternative asset managers like Brookfield than most investors are factoring in.
All of Brookfield Corp.’s publicly traded divisions have underperformed the S&P 500 in this year’s rate-driven equity selloff. As a result, the analyst thinks Brookfield Asset Management should trade at a more modest valuation of 15 times earnings which, he adds, is not far off from the multiple that Brookfield paid to acquire Oaktree in 2019. 

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December 21, 2022
Canadian banks debt servicing costs will hit a new high in 2023: Analyst

Our Financial Services Analyst Nigel D'Souza was on BNN Bloomberg discussing his outlook for the Canadian Big Six banks as Canadians face inflationary pressure and higher mortgage rates.
What is important to remember is that most mortgage holders will only face payment shocks when their mortgages renew, he said, adding that only 12% of mortgage holders at the Big Six banks will renew their mortgages in 2023 and another 12% in 2024. 
"The bulk of renewals actually happen after 2024," he said. "What really matters is not just interest rates being high today, but if interest rates stay high for at least another two years."
On the other hand, Nigel expects debt servicing costs for Canadian households to hit a new record in 2023 if interest rates stay high, which will increase credit losses at the banks. Much depends on whether Canada goes into a recession and how severe it is next year.
His only BUY-rated bank of the Big Six is Bank of Nova Scotia (NYSE, TSX: BNS). "Yes, there is uncertainty on how the new CEO is going to deliver on strategic targets, but the valuation is extremely discounted." He also discusses why the others of the Bis Six are rated REDUCE or SELL.

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December 19, 2022
Manulife - “If we’re entering a recession, there’s more stability there"

Nigel D’Souza, our Financial Services Analyst, sees the global economic outlook as offering stiff headwinds for profits for Canada's life insurers, which is why he favours Manulife Financial Corp. (NYSE, TSX: MFC) over Sun Life Financial Inc. (NYSE, TSX: SLF) and Great-West Lifeco Inc. (TSX: GWO).
The majority of Manulife’s profit is generated by core insurance, with about 30% from wealth management, he told Globe Advisor. Sun Life generates about 40% of its earnings from wealth and asset management.
“If we’re entering a recession, there’s more stability there [in Manulife],” Nigel said, adding that it has the strongest capital position out of the life insurers, trades at the lowest multiple and has the most stable earnings. “If you’re just betting on equity markets doing better, why do that owning Sun Life? Why not just own a market exchange-traded fund or an index fund?” he said.
Manulife has seen its share price decline the least of the three this year – down 1%. That compares to a decline of 21% for Great West and 12% for Sun Life. Nigel has called MFC a BUY through 2022, while Great West and Sun Life have had varied ratings but are currently REDUCE rated.

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December 14, 2022
BMO's plans to fund Bank of the West deal shaken by surprise OSFI capital-buffer changes

Veritas Financial Services Analyst Nigel D'Souza comments on Bank of Montreal's recent equity offering to pay for a major acquisition.
“At that time [BMO announced the acquisition of Bank of the West at the end of 2021], BMO, just like everyone else, wasn’t aware that we’d be heading into a significant rate hike cycle and that we would be talking about recession risks in 2023, or that OSFI was going to raise the domestic stability buffer in 2022,” D’Souza said. “So, given what BMO was worth at the time, it wasn’t a strategic error on their part to acquire Bank of the West.”

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November 29, 2022
Veritas Real Estate Investor Survey: Panic Room or Room to Panic? Fall 2022

As part of our recent Veritas Great Canadian Real Estate Conference, our Financial Services Analyst Nigel D'Souza informally surveyed residential real estate property investors this fall to get of picture of what their intentions are in the next 12 months. Our belief is that residential real estate property investors, whether they are selling or buying, will play a big role in the future of house prices. If there is an economic shock, the first wave of selling is likely to come from this group, particularly investors with negative cash flow investment properties. Here are our findings:
• Sentiment: Just 27% of respondents are looking to buy one or more properties over the next 12 months. But at the same time, there is no rush to sell, as just 22% of respondents are looking to sell in the next 12 months. Higher interest rates have so far led to lower demand but not higher supply.
• Cash flow picture: Fewer properties are cash flow negative than before the pandemic thanks to rising rents and mortgages that have not rolled over to higher rates.
• Rising rates: There is a lag between when rates rise and mortgages roll over at higher rates. There is no panic in Canadian real estate but that will change if rates stay high and some investors are forced to sell.
• Outlook: In 2019, the household debt service ratio (DSR) peaked at 14.9% with the Bank of Canada (BOC) policy rate peaking at 1.75% in 2018. With household leverage at record highs, above 2019 levels, and a BOC policy rate of 3.75% with additional hikes in the pipeline, we expect the household DSR to set a record high by the end of 2023.

Download the slides for more.

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November 28, 2022
We believe there will be a deterioration in the macro outlook for the Big Six banks: Nigel D’Souza

Our Financial Services Analyst Nigel D'Souza was a guest on BNN Bloomberg, providing his outlook for the Canadian banks as they start reporting their Q4-F22 results this week.
He expects the banks to start reporting higher provisions for credit losses on performing loans this quarter, as the macroeconomic outlook has deteriorated since the banks reported Q3 results. "When you look at the assumptions banks use to model credit losses, last quarter's assumptions are a bit optimistic relative to current consensus economic forecasts," he said, also explaining that the provisions taken won't be uniform across all the banks because some of them already have excess reserves.
"What is baked into consensus is an expectation for a mild recession in Canada with credit losses running at about the same level as pre-pandemic," he said. However, we have more household leverage today than we did in 2019 and the Bank of Canada policy rate is already at 3.75% versus a high of 1.75% in 2018.
Nigel's lone BUY amongst the Big Six banks is on Bank of Nova Scotia (TSX: BNS). 
"Scotiabank's share price has underperformed substantially over the past two years. It is trading at a very discounted valuation," he said. "Weak fundamentals are more than reflected in the share price. Yes, there is some uncertainty with the leadership change recently, but we think you're getting a positive risk versus return for Scotiabank that you aren't quite getting with other banks that are only pricing in a mild recession."

Watch the replay: We believe there will be a deterioration in the macro outlook for the Big Six banks: Nigel D’Souza

Or read the article summarizing the interview: Canadian banks may downgrade economic forecast, but not confirm recession: analyst

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November 21, 2022
Home Capital's current share price worth below $30/share is a worse-case scenario: Nigel D'Souza

Our Financial Services Analyst Nigel D'Souza appeared on BNN Bloomberg today to discuss Home Capital Group Inc. agreeing to be acquired by Smith Financial for $44 per share.
"I think the offer is fair," he said. "I think shareholders should accept and approve it."
Nigel had been telling our clients to BUY the stock recently because it was trading at an "incredibly cheap" valuation. 
The stock, up about 57% today, was trading at about $27 before the offer, which was about 4 to 5 times forward earnings. That valuation was about where Home Capital traded at the bottom of past cycles, such as the Great Financial Crisis from 2008 to 2009.
"The valuation [before the offer] was severely depressed," he said. " I think it was driven by sentiment and concerns of a potential recession on the horizon in 2023 and the impact of rising rates on the real estate markets."
The current offer is about seven times forward earnings, which is still below the historical average, but fair given the economic uncertainty and chances of a recession. Nigel doesn't think another bidder will emerge.

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November 1, 2022
Brookfield Eases Concern About Slow Deal Pace With Westinghouse Sale

Dimitry Khmelnitsky, our Vice President Head of Accounting & Special Situations, initiated coverage on Brookfield Asset Management Inc. recently and was quoted in this Bloomberg article about the recent sale of one of its holdings, Westinghouse Electric Co. for US$8 billion. 
As the article says, some Brookfield investors had grown impatient about the amount of time it was taking to sell portfolio companies and free up capital for new investments. While Brookfield says more deals are coming, Westinghouse was sold to one of its own affiliates, Brookfield Renewable Partners LP, and uranium miner Cameco Corp.
"The sale of Westinghouse does not prove the company's ability to monetize large assets at attractive valuations, particularly in the current environment, because it was sold in large part to a related party," Dimitry said. "I am not convinced Brookfield Business Partners would have received the same price and generated such an attractive return if the deal was done between truly independent third parties."

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October 31, 2022
Veritas Representing Canadian Investors to International Accounting Standards Board

It's probably not well understood how accounting standards get set. For those unfamiliar with it, the IFRS Foundation is a non-profit that oversees the International Accounting Standards Board, an independent group of experts who set accounting standards for most of the world, except the U.S., which has its own.
When you think about it, the IASB has an enormous responsibility. Reliable accounting is the cornerstone of global capital markets. Investors place trillions of dollars of capital worldwide because they have confidence in the financial statements.
Accounting is far from perfect. Fraud happens. Sometimes CFOs are less than honest. The rules can be incredibly complex and open to interpretation. The world of business is also ever-changing, and accounting needs not just to keep up, but keep getting better.
That's why the IASB has the Capital Markets Advisory Committee. This independent body aims to provide the IASB with regular input from the international community of users of financial statements.
Veritas President and CEO Anthony Scilipoti has represented Canadian investors and users of financial statements on CMAC for the last two years and was recently appointed as co-Chair for the next two years.

See more of Anthony's post about his appointment on LinkedIn

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October 28, 2022
Shopify's Rising Customer Acquisition Costs

Desmond Lau, our Communication Services & Information Technology Analyst, weighed in on the future of Shopify Inc. in this feature in The Globe & Mail's ROB Magazine: Solving Shopify’s misery: How Canada’s tech saviour lost its swagger — and why investors remain so scared.
Shopify, which is down ~75% this year, was perfectly situated when COVID-19 hit. 
"For them to sign up merchants, it was almost like shooting fish in a barrel. People were desperate to get their stores online," Desmond said. Now that the world has re-opened, it's clear a lot of demand was pulled forward.
In 2021, the company spent 21% of its revenue on sales and marketing, Desmond noted. That has jumped to 25% this year. In consulting terminology, this means Shopify now has a higher cost of customer acquisition, a crucial metric for tech companies.
As the magazine article was published, Shopify reported a better-than-expected Q3-F22, which didn't surprise Desmond as e-Commerce trends appear to have troughed (at least temporarily).
However, for a company currently without earnings, he cautions that Shopify's revenue is highly discretionary and subject to a pullback in a recessionary environment, while the valuation remains high. 
At US$34, he estimates that investors need to believe in a 22% revenue CAGR over 10 years, assume a material decline in operating expenditures and assign a 25x free cash flow multiple in order to generate a 10% annual return.

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October 28, 2022
HEC Montreal's student-led investment fund (FPHEC) visits

It's been two years since we hosted students in person. It was a pleasure hosting this morning FPHEC, HEC Montreal's student-led investment fund that actively manages over $300,000 in long-only value investments. We spent much of the morning telling them about how we do what we do and why accounting and independent analysis is so important in the investment process.

Benjamin Butler, Research Associate Utilities & Infrastructure, with FPHEC students Oct. 28, 2022.

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October 27, 2022
Vlaad & Co: Fall Call 2022 – Video

Our President and CEO Anthony Scilipoti appeared on Vlaad & Co's Fall Call, which is about Recruitment, retention, and compensation trends for Canadian private equity, asset management, capital markets, and banking. At about the 28-minute mark, he talked about how the pandemic affected the buyside and sellside, long-term trends in how the sellside is being paid, the next five years for research and where Veritas Investment Research finds its talent.
 

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October 24, 2022
Veritas Investment Research 22nd Anniversary

It is Veritas Investment Research's 22nd anniversary this month and our President and CEO spent some time reflecting on the bedrock of our success. Here is what he wrote on LinkedIn:
"It comes down to passion. How do I know?
The other day one of our newer analysts barged into my office beaming. I put my call on hold. He could hardly contain his excitement - he had found a critical piece of information for his investment thesis. It was energizing!
Or in another case, I asked a team member how long they had spent on a complex project. Their response was, in a surprised tone, "I don't know?" That made total sense to me because when you love what you do, you don't keep track of the time or effort expended. It's the outcome that matters.
In both cases, I see passion for the truth. That is Veritas. That is our passion. 
Twenty-two years ago, we set up to change Bay St. with independent research. Today we are empowering investors and users of financial statements with our research, our training, our conferences, our asset management, and our philanthropic endeavours.
Congratulations to the Veritas Team, and special thanks to our clients, our investors, our advisors, our suppliers, and especially our families and all those who believed in us. You fuel our passion! - Anthony Scilipoti

Michelle Mercer, Corporate Secretary & Client Relationship Manager; Darryl McCoubrey, VP and Head of Research; Anthony Scilipoti, President & CEO.

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October 14, 2022
There's likely an external shareholder pressuring HSBC to focus on their core business: D'Souza

Nigel D'Souza, our Financial Services Analyst, joined BNN Bloomberg to discuss why HSBC Holdings would consider selling off its Canadian division.
"It could possibly be a retrenchment of their key markets and core geographies. Canada is a good market for banking, but the Big Six banks have a very protected and entrenched market share. It's difficult for any competitor, even an international bank, to come in and take significant market share," he said. "There's also likely an external shareholder pressuring them to focus on their core business."
The only domestic bank that has the capital to buy HSBC's Canadian division is Royal Bank of Canada, he explained, but RBC may not be willing to take on that risk heading into a recession. The other banks have already made large acquisitions or don't have excess capital currently, while National Bank is focused on Quebec.
He also discussed his recent reduction in valuations for the sector.

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October 14, 2022
Veritas cuts bank targets, citing sour loan concerns

Our Financial Services Analyst Nigel D'Souza lowered his valuations on the Big Six Canadian banks, saying that rising borrowing costs and a potential recession could lead to an increase in provisions for credit losses (PCLs), as reported in this BNN Bloomberg article.
“We expect provisions for credit losses (PCLs) in [fiscal year 2024] to run materially above pre-pandemic levels barring a dovish pivot by central banks. Historically, peak credit losses lag an increase in debt servicing costs by ~two years,” he said.
“We expect debt servicing costs to increase to a record high in 2023 and expect PCLs to accelerate and potentially peak in 2024 with inflationary pressures, rapidly rising rates, and provisions for performing loans under IFRS 9 likely pulling forward the recognition of PCLs.”
While he lowered his valuations, he did upgrade Bank of Nova Scotia to a Buy and reiterated that TD Bank is his top recommendation in the sector.

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September 16, 2022
Housing Sentiment Explained - With Anthony Scilipoti

The One Thing is a quick-hit video segment in which we will present to our clients one idea, trend or data point that we believe investors should consider or may be overlooking. Please enjoy complimentary access to this replay and feel free to share with others.

In this five-minute One Thing segment, Anthony discussed adapting the Kubler Ross Stages of Grief to housing sentiment. He covered:
•   The five stages: Denial, anger, bargaining, depression, and acceptance. "We're somewhere between denial and anger. The reason why there are fewer homes listed and fewer transactions is that we're in denial."
•   Key factors that will impact housing prices. "It's really tied to unemployment. If unemployment holds up here, I think we could turn around really nicely. But if unemployment gets weaker as the economy gets weaker, then we're going to have a problem."
•   The outlook: "The Debt Service Ratio is still low because it takes time for mortgages to reprice as they get renewed and for individuals to face that. As we hit these trigger rates, that is going to exacerbate things because many people didn't know about trigger rates."

Please join us for our Veritas 10th Annual Great Canadian Real Estate Conference: Shaking the Foundations on October 6, 2022.

If you would like to hear more about Veritas, please sign up for our free News and Insights Newsletter.

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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

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August 22, 2022
Rising recession risks could make Canadian bank executives change their upbeat tune

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.”

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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. 

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August 3, 2022
Insurance Investors: What you need to know about IFRS-17

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

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July 28, 2022
What to Watch in a Nervous Housing Market

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

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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. 

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July 15, 2022
Canadian bank stocks could fall another 5-15% before they hit bottom

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

Source: Refinitiv

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June 24, 2022
Investors are selling banks now anticipating impact of headwinds in 2023

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%.

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June 17, 2022
Fact-Finding Video 94: Perfect Personal Portfolios - With Steve Foerster

We held a recent video conference for our clients that we thought others may also find helpful in navigating the difficult markets. Please enjoy complimentary access to this replay and feel free to share with others.

Steve Foerster, a Professor of Finance at the Ivey Business School at Western University, 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.

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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. Please enjoy complimentary access to this issue and feel free to share with others.

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. 

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June 1, 2022
We could see valuation headwinds for banking sector if BOC moves above 2%

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.

 

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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.

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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.

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May 5, 2022
Episode 91: Why Bitcoin Isn't Digital Gold

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?

If you would like to get to know Veritas better, please sign up for our free News and Insights Newsletter. Or contact Sales to find out how to become a subscriber.

 

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May 3, 2022
Canadian corporations get lucky on pension funding

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. 

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April 7, 2022
2021 is not an appropriate benchmark for bank profitability: Analyst Nigel D’Souza

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."

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March 22, 2022
Biggest risk of bank surtax is precedent it sets: Veritas Analyst

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.

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Why We Favour Energy: 
V-List Performance Overview February 2022

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.
They discuss:
•   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.

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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. 

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February 23, 2022
The Canadian banks will show softer earnings results this quarter
BNN Bloomberg

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."

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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.

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February 9, 2022
Analyst cuts five of Big Six banks to sell on rate-hike fallout
BNN Bloomberg

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.

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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.

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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.

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January 26, 2022
Canadian banks stand to benefit once the BoC hikes interest rates
BNN Bloomberg

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.” 
 

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January 24, 2022
Canada's housing market is betting interest rates will never rise
Bloomberg

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.

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January 21, 2022
Fresh vs frozen: Circle K, On The Run parents face off in convenience store food fight
BNN Bloomberg

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.”

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2021

December 30, 2021
IASB’s Investor Update December 2021 Newsletter - Profile

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

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December 20, 2021
Holiday Season Charity Drives

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.

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December 19, 2021
Bombardier shares drop as Swedish corruption probe unfolds

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

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November 29, 2021
Preparing for bank Q4-F21 earnings

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.”

Watch the Replay: We could see an underperformance in Canadian banks if interest rate hikes lead to delinquencies

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November 12, 2021
A Message from our President and CEO - Veritas 21st Anniversary

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).

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November 03, 2021
Banking regulator set to make an announcement on capital distributions

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.

Watch the Replay: I expect OSFI to announce banks can pursue dividend hikes and share buybacks: Analyst 

Nigel was also quoted in this article by The Canadian Press about the same topic: Banking regulator lifts restrictions on dividend raises, share buybacks

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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.”

For a summary of the presentations at the conference including Anthony's, see Conference Summaries. You can also view the slides from his presentation or see more about the conference here. 

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October 25, 2021
Focusing on the Essentials: V-List Overview Q3 2021

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.
They discussed:
•   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.

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October 24, 2021
SNC-Lavalin suing government for damages over Montreal’s Champlain Bridge project

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

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October 21, 2021
Emera not currently the best choice in utilities

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 

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October 8, 2021
How to play the new energy bull market

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 

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September 30, 2021
Canadian tech firm Lightspeed walloped by short-seller attack

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 

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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

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September 22, 2021
Liberal tax hike will impact earnings but not the economic fundamentals of banks

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.”

Watch the replay: Liberal tax hike will impact earnings but not economic fundamentals of banks: Investment analyst 

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September 19, 2021
Market Champion Podcast - Forensic Accounting & Identifying Superior Companies

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:
•  Spotify
•  iTunes/Apple Podcast
•   YouTube

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August 23, 2021
Canadian banks will have to navigate the impact of the Delta variant

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

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August 16, 2021
Consistent Long-Term Outperformance: V-List Overview First Half of 2021

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.

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July 28, 2021
Canadian restaurant stocks rebound from COVID-19 pandemic, but concerns linger

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

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July 21, 2021
Investors unlikely to reward pandemic-boosted Canadian bank results

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

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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

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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.

Read the full article: With limitations of remote work becoming more evident, REITs will be among biggest beneficiaries

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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

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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

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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. 

See the full article: Canadian auto parts makers give investors a chance to bet on North America’s economic reopening

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May 27, 2021
Veritas Analyst Dimitry Khmelnitsky Top-ranked For Special Situations Again

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.

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May 27, 2021
Regulators now equipped to crack down on misleading financial metrics

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

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May 25, 2021
Canadian banks likely to release pandemic-era provisions for sour loans

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

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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. 

See the full article: CN and CP are offering enormous sums for Kansas City Southern, but history suggests the payback will be robust

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May 12, 2021
What to expect from Home Capital Group earnings on Thursday

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

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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?”

See the full article: Flexible reporting standards mean investors know little about when companies used emergency wage subsidies

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May 7, 2021
How dividend stocks can protect you from inflation

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

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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

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April 30, 2021
The trouble with ‘bubble’: Why Canada’s red-hot housing market is defying the burst

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

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April 23, 2021
Solar Industry: Making Sense of Complicated Non-GAAP Metrics

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.

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April 1, 2021
Veritas Analyst Appointed to Canadian Accounting Standards Board

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

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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?

Subscriptions to our Fact Finders are available: Find out more

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March 12, 2021
Household Savings Is Fuelling The Demand Side Of Canada's Housing Market

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

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March 11, 2021
SPAC'd out: Everything you need to know about the next hyped-up investment fad

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

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February 22, 2021
Canadian banks earnings preview

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. 

Watch the replay: Investors should be overweight Canadian banks tied more closely to financial markets

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February 16, 2021
Shopify's Growth Path Is the Biggest Unknown As Valuation Soars

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.”

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February 5, 2021
Beaten-down REITs could see negative sentiment reverse quickly as lockdowns end

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

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January 21, 2021
TC Energy could shrug off loss of Keystone XL pipeline project

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

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January 21, 2021
CPAs and the New Social Contract: The Rise of the Warrior Accountant

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

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January 10. 2021
Canadian clean energy would benefit from Keystone XL blocking

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

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January 8, 2021
Pandemic, oil downturn hitting Calgary's office real estate with one-two punch

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

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January 6, 2021
Markets react to prospect of 'blue wave' in Georgia Senate vote

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