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Risk tolerance and safety:
How much risk tolerance do you have? That’s a fundamental question that investment advisors ask their clients and it’s the guiding principal that informs all their trades. The names below veer on the side of predictability and safety, including two Canadians ones, while one is a riskier play but boasts a strong franchise and long track record. Which one(s) is for you depends on how much risk you can swallow.
Constellation Software Inc. (CSU-T)
No, this is not the alcohol conglomerate, but a highly successful Canadian software company that boasts returns of 11% in the past year and 183% over the last five. For a tech company, CSU boasts a low beta of 0.81 and trades at a PE just below 81x. Compare that valuation to its five-year median average of 62.55x, but the current level remains 50% lower than its peak of 128.13x at the end of 2021.
CSU grows by buying, 270 start-ups since 2006 to be precise. They acquire well. Lately, CSU announced that it and its subsidiary Lumine Group will spin off Volaris to acquire WideObit, an American media vertical market software provider. Constellation shareholders will receive three shares of Lumine for every share of CSU they own. As long as Constellation continues to follow this growth-by-acquisition strategy, it will grow. The company has beat three of its last four quarters, including the most recent one by a wide margin, $21.60 EPS vs. the expected $17.96.
The house of Mickey has been the talk of Wall Street of late after it delivered an impressive quarter last week, cost cuts and the resumption of its dividend sometime this year. CEO Bob Iger has been hailed as the returning saviour and, indeed, he was charming and persuasive in his conference call and media interviews after the report. DIS shares popped 5% immediately after hours, but finished last Thursday -1.31%, because the overall market sank on interest rate fears.
Nonetheless, market sentiment has swung back in Disney’s favour, rebounding after DIS shares plunged to $84.07 fewer than two months ago. The market punished Diney for its streaming service’s operating losses soaring 134% in the past year and its average revenue per user (a key metric) tumbling. True, the theme parks have been booming with attendees willing to pay higher fees, post-pandemic, but it wasn’t enough. (To be fair, previous CEO Bob Chapek started his job just as Covid hit and steered the company through months of empty theme parks and cruise ships.)
Singing the same tune as Mark Zuckerberg at Meta/Facebook, Bob Iger is touting cost-cutting as his theme for 2023. He will cut 7,000 jobs and slash US$5.5 billion in costs. Iger will also restructure the company into three divisions: Entertainment, ESPN, and Parks, Experiences and Products. (Iger, though, refuses to comment on selling Hulu.) These are drastic, sweeping moves, but ones that the street likes. Among the first to approve was activist Nelson Peltz who was campaigning to secure a seat on the board. Right after the quarter, Peltz ended his campaign and gave Disney his thumbs up.
On Monday this week, JPMorgan reinstated its coverage with an overweight (buy) rating at a $135 price target. That’s 25% above last Friday’s close. The wind is clearly back in Mickey’s sails after a dismal late-2022, and this momentum should push DIS shares higher in months to come.
One of the most defensive plays on the TSX is the TSX itself. Trading under X on its own exchange, the TMX Group just reported another beat, its third in the past year, with revenues jumping 80% over full-year 2021 and net income leaping 60% also over FY 2021. Robust Canadian stock performance (outperforming the Wall Street majors in 2022) and ongoing volatility are good for TMX’s business. Selling data provides another recurring revenue stream. TMX currently pays 2.58% but that dividend has been climbing since 2016. Also, its beta is a measly 0.56 and it trades at 14.16x. Safe.
Caveats are the lack of dramatic price movement ahead. Also, shares are only $5 off their peak of $142.92, which includes a near-2% rise on Monday. Buy on a pullback to add stability to your portfolio so you can invest in more speculative names.
