Stockchase Insights

 TD still owns 9.8% of SCHW. While we are not too worried about a 'bank run' on Schwab, there is definitely a shift from low interest accounts to money market accounts, with estimates of $20B a month moving. 
Customers are staying, but this shift is likely to impact earnings. 
The company also bought long term bonds and has significant unrealized losses. So, it is a question of what happens next. 
On paper it looks fine, at 13X earnings, a good dividend and historical earnings growth. But EPS could be impacted by 30%, and that is before any decision to take a loss on the bond portfolio. Actual outflows have still been more than $1B a day, and in such cases investors and depositors cannot be counted on to act rationally. 
A bad headline could accelerate the situation. Brokers are falling over themselves to downgrade, and the stock has had its worst month since 1987. The CEO comments help, and there has been insider buying at least. But we can't really add depth. 
Either confidence returns, or it doesn't. In the latter, the company gets into an ugly situation of having to sell securities at a loss to backstop capital, and this can be a downward spiral. It is hard to really endorse it considered extreme uncertainty. 
Especially compared with safer Canadian banks with higher dividends and lower valuations. 
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ZTS operates as an animal health medicine, vaccine, and diagnostic product. ZTS has performed well in the last five years with consistent, stable and recurring revenue growth, and is now trading at 30x times' Forward P/E, which is at the lower end of historical averages. The balance sheet is OK, with net debt of $4.6B. 
Total debt is around 2.4x times trailing twelve-month cash flow of $1.9B, and cash flow declined slightly around 14% compared to $2.2B last year largely due to investment in inventories. 
Based on consensus estimates, sales are expected to grow by 8% on average over the next few years. Overall, the company has been growing, increasing dividends and repurchasing shares consistently over the last few years, the main issue is the valuation: it is trading at a premium level given the high quality of the business. W
e would be comfortable averaging into ZTS over time. 
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EPS of ($0.065) matched expectations and revenues of $1.81M doubled expectations of $0.9M. 
For the full-year the company generated sales of $2.2M, indicating its significant ramp up in revenues into the latter half of the year. Its revenue jump is attributable to the execution of engineering services agreements, however, its operating costs increased as a result of a higher headcount. The revenue jump is encouraging, however, its net less grew from ($24.6M) in the prior year to ($40.0M) in the most recent year. 
The company's balance sheet is OK and it continues to operate at a loss and with negative free cash flows. 
We would like to see the company accelerate its revenues faster than operating costs, and while its revenue growth and momentum look good, we would consider it to be a higher risk name at this point. 
We would be OK with this name as a high-risk name, while being mindful of its small-cap risks, significant unprofitability, and position sizing. 
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How Come the Market is Rallying with All the Bad News Out There? We have high-interest rates, inflation, war, pandemics and a financial crisis, amongst other problems. So how come the markets are so resilient? Well, as they say, markets climb a wall of worry.

If you want to worry, there are plenty to choose from. But keep in mind two things. First, valuations might be lower as fearful sellers exit positions. Lower valuations can set up better investment returns for those brave enough to step in.

Second, when all the news is bad, any actual positive developments can have a larger influence. If investors are worried about eight-per-cent inflation and it comes in at six per cent, there can be some relief buying. If you expect your company to report lower earnings and it reports flat earnings, even that so-so report can spark a sudden rally since no one was expecting anything, anyway.
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Considering the earnings impact of the new loan rates should be in the 7% to 11% range, the 20% drop (two days) to us seems a bit much. 
But the loss on Canada Drives is also a factor. GSY still expects growth, and we largely expect to still meet its three-year growth plans. But, there is still macro risk, and sentiment may take a while to recover here. 
Based on the company's adaptability in other challenges of the past 15 years, we are confident they will steer out of this. 
GSY's comments on the move hurting smaller competitors 'more' are valid, in our view. It could pick up some market share. 
At 6X earnings now and with a 4.2% yield that likely is not in any jeopardy, we think it is worth staying the course for now. We have not heard back yet with a specific response from the company. 
The company is the one that determines whether an event is material.  
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Dividend Explanation:
When looking at dividends, it is usually better to look at cash flow rather than earnings. 
Earnings have lots of non-cash expenses that impact results, such as depreciation and stock-based compensation, but have no impact on cash. But companies need cash to pay dividends so we prefer to look at operating cash flow. 
On that basis, in 2022 TRP had $6.4B in cash flow, and paid out $3.2B in dividends, for a payout ratio of 50%.  
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SD is a $520.5M company with a revenue base of $254M, almost no debt, strong free cash flows over the past few years, and has been building up its cash balance to now $255.7M. The stock is cheap, it does not pay a dividend, and insiders own 1%. 
Fundamentally, it looks good here, although a lot will depend on the oil market, and any downside shock in the price of oil can cause its cash flows to turn negative. 
Its balance sheet and cash position are strong enough to withstand a bad market, and so we would consider it a good value play. 
Investors should be mindful of position sizing and the risks due to its smaller size.
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Are My Canadian Bank Deposits and Brokerage Accounts Safe? This is by far the most popular question asked by investors over the past two weeks. Having multiple bank failures in the United States has certainly raised concerns with savers and depositors. The short answer is … probably.

The Canadian financial system has a different regulatory system than the U.S., and it is far less competitive, meaning banks don’t need to take as many risks. Canadian deposit insurance is $100,000, and there are discussions right now about raising this limit. Broker accounts have $1 million in insurance under the Canadian Investor Protection Fund. The Canadian record of protecting investors is solid, and our banks fared much better in the 2008 financial crisis than their U.S. counterparts.

Could a bank run happen on a Canadian bank? Sure, anything is possible, and confidence is still the key to the banking system. But as in the U.S., we would expect governments to step in and protect investors, to prevent an entire financial system collapse. Thus, we would not lose much sleep over the safety of our Canadian banks.
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TCN pays a decent dividend yield of 2.3% and has grown its dividend by ~3% annually over the past five years. 
TCN is fairly levered, and we believe in a better market will be able to demonstrate its ability for high growth rates. 
We would consider the current prices to be good entry points - the price to book multiple is 0.5X and its forward price to sales is 4.0X, the lowest across 10 years.
Due to its higher debt balances and uncertainty around the real estate market, we would not consider this to be a screaming buy yet, but we feel that in a better market, these prices will likely look attractive.   
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CIX’s fundamental metrics – its Asset under Management (AUM) has been quite resilient amid a challenging macro environment, with growth mainly coming from US wealth management, which management indicates is the key growth lever for the company in the future. In addition, the company has a track record of repurchasing shares aggressively in recent years, which indicates management believes shares are undervalued.

Like other names in the Financial sector, CIX has been under pressure recently due to the fear of contagion risks in the financial systems, as well as weak capital markets. Although there is a contagious sentiment risk, we think this risk is low in probability as the Fed and other countries’ central banks publicly announced their intention to stabilize the Financial system. CIXs is not impacted by deposits, but margins are trending down and business remains competitive. But the stock is priced right, and it has managed a challenging environment well enough and made good acquisitions over time. Overall, we think CIX is a hold.
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Certainly the Lundins know the mining business and have had multiple success world wide. 
The stock is cheap. The balance sheet is quite strong, and we would not see the dividend at risk, though of course in a highly cyclical industry much can change. 
The dividend has grown nicely and the company has also paid out special dividends. 
EPS may be flat this year with lower prices and inflationary costs, but more growth is expected in 2024. 
We would consider it one of the better and more-conservative names in the mining sector right now.  
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The Importance of Pricing Power: Inflation has been a hot topic in the investment community in the last two years. Every investor wants to protect their portfolio from losing purchasing power by diversifying into different asset classes such as real estate, foreign currencies, gold, real estate, crypto, etc. We think one of the best hedges against inflation is through the ownership of great businesses with significant pricing power that could raise prices to offset costs pressure without losing volumes. We believe that companies with strong pricing power have the ability to do well in an inflationary environment for these particular reasons: 1) The ability to raise prices to offset inflation without losing volumes helps companies maintain their profit margins 2) Pricing power allows companies to price their with flexibility, sometimes even faster than average inflation rates of 3-4%, leading to operating profit margin expansion 3) A high gross margin can be a powerful lever for organic growth over the long term, especially for companies with mature volume growth.
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DB has fallen 94% since just before 2008 and on paper, this is a very similar pattern to CS. DB is down ~6% today and its Credit Default Swaps (CDS) have been moving substantially higher today, indicating that investors are paying up for insurance in the event that DB fails or defaults. At times, these events can become a self-fulfilling prophecy, and a material decline in its share price can lead to fewer funding options and a worse liquidity picture for the company. The Fed and other central banks around the world established open swap lines the other weekend so that in the event of depositors withdrawing funds from a foreign bank, that foreign bank can call upon the Fed and receive par for US Treasury Bills, even if they are well below par on the market. This was not established when CS failed, and we feel that this might help to alleviate any issues with DB.  

Overall, as we've learned, these events can happen fast, and we're not ruling out the possibility of DB failing, but everyone, including the Fed and the US Treasury are keeping a closer eye on these possibilities and we think that higher level of scrutiny should help to quickly respond to any weaknesses in the bank.  
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We still think it is interesting as speculative buy but would not add. We have additional comments posted this morning.
Insiders own 9% directly and 14% via holding companies.
Through third parties, ECN originates prime and super-prime consumer loans for housing and RV purchases as well as for inventory financing and floorplan loans.
With concern on recession and higher interest rates, demand for such loans saw a significant drop in the quarter.
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 The ARK funds have likely bottomed, on the basis that interest rates and inflation have peaked. Although, even if the fund has truly bottomed, it may trade sideways for longer than an investor can wait, and we would not expect the parabolic action that it saw in 2020 to occur anytime soon. The underlying companies in the fund are growing fast, but valuations are still on the high end, and we feel it will take a substantial shift in market sentiment to a 'risk-on' environment to see material gains in the name. With that said, we think the name can do well over a long timeframe, and we think investors will need to be patient here.  
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