Great update. Aside from BN, curious if there's any other Canadian assets you like now, particularly banks. Assuming you steer clear of energy (ENB, SU, CNQ, etc).
Hi Sloan, I haven't gone through many Canadian large caps in a while. I've looked VERY briefly at Canadian banks and generally found the US banks I was looking at were better managed, had better prospects (exist in a structurally lower risk and higher growth economy), and had no choice but to get smarter in terms of lending discipline after the financial crisis (introduction of Dodd Frank Act).
There has not been a shake-out in Canada like there was in the US, and so my sense was the behind-the-scenes fundamentals are not as good. E.g., in the US, mortgage loans were supported by lower housing prices, and higher incomes in relation to prices. Residential has been stretched in Canada in relation to incomes. US mortgages are also generally 30-year fixed-rate and the banks assume the interest rate risk, not the consumer. In Canada, you just do a test that doesn't seem strict enough to me. On the industrial & commercial loan side, I don't know as much though.
Operationally, I know they're also behind the US and they are not moving with as much urgency to catch up. This is a growing regulatory risk. (TD would be a case in point. It's been almost 9 years since Wells Fargo set new precedents as to what's going to happen to banks that aren't running themselves in a smart way operationally and in terms of sales practices, and TD still managed to get caught out.)
If I had to pay 1.5-2 book for a developed markets bank, I would buy JPMorgan or Bank of America and call it a day. South of the border, I can simply get better banks, and they often traded at cheaper prices.
If I was buying a Canadian bank for 75% of intrinsic value or something, I'd probably just put more money into Brookfield today, which is similarly undervalued, has way better future prospects, and is way, way better managed. I also ended up with Ally, which is well-managed and traded for what I thought was less than half of fair value if I'm right. I don't think if I looked at the big Canadian banks, I'd walk away thinking one of them had similarly attractive risk/reward.
w.r.t. energy, I don't really avoid any kind of company. I know people at Enbridge and if they are to be believed it is not the kind of management I'd want to be behind. The pipeline business is inherently decent, though. You build a pipe once, and as long as you can keep it filled with oil, you get to charge inflation-linked tolls (maybe more) and increase prices per barrel for years and years to come.
If I'm not mistaken, companies like CNQ are well-managed, though. There are a few well-managed energy companies in Canada. It's just that they have to be trading at something like 20% free cash flow yields to be interesting since they are not growing businesses and the industry has a big capex risk. You usually need to get energy assets outrageously cheap to make money. Oil demand growth also faces more headwinds than in the past (less so for gas). I have to admit, I think I missed the opportunity to own certain oil & gas assets in 2020/2021.
In all, I think the way I looked at it, it's simply not the first place I'd be fishing for ideas.
Great update. Aside from BN, curious if there's any other Canadian assets you like now, particularly banks. Assuming you steer clear of energy (ENB, SU, CNQ, etc).
Hi Sloan, I haven't gone through many Canadian large caps in a while. I've looked VERY briefly at Canadian banks and generally found the US banks I was looking at were better managed, had better prospects (exist in a structurally lower risk and higher growth economy), and had no choice but to get smarter in terms of lending discipline after the financial crisis (introduction of Dodd Frank Act).
There has not been a shake-out in Canada like there was in the US, and so my sense was the behind-the-scenes fundamentals are not as good. E.g., in the US, mortgage loans were supported by lower housing prices, and higher incomes in relation to prices. Residential has been stretched in Canada in relation to incomes. US mortgages are also generally 30-year fixed-rate and the banks assume the interest rate risk, not the consumer. In Canada, you just do a test that doesn't seem strict enough to me. On the industrial & commercial loan side, I don't know as much though.
Operationally, I know they're also behind the US and they are not moving with as much urgency to catch up. This is a growing regulatory risk. (TD would be a case in point. It's been almost 9 years since Wells Fargo set new precedents as to what's going to happen to banks that aren't running themselves in a smart way operationally and in terms of sales practices, and TD still managed to get caught out.)
If I had to pay 1.5-2 book for a developed markets bank, I would buy JPMorgan or Bank of America and call it a day. South of the border, I can simply get better banks, and they often traded at cheaper prices.
If I was buying a Canadian bank for 75% of intrinsic value or something, I'd probably just put more money into Brookfield today, which is similarly undervalued, has way better future prospects, and is way, way better managed. I also ended up with Ally, which is well-managed and traded for what I thought was less than half of fair value if I'm right. I don't think if I looked at the big Canadian banks, I'd walk away thinking one of them had similarly attractive risk/reward.
w.r.t. energy, I don't really avoid any kind of company. I know people at Enbridge and if they are to be believed it is not the kind of management I'd want to be behind. The pipeline business is inherently decent, though. You build a pipe once, and as long as you can keep it filled with oil, you get to charge inflation-linked tolls (maybe more) and increase prices per barrel for years and years to come.
If I'm not mistaken, companies like CNQ are well-managed, though. There are a few well-managed energy companies in Canada. It's just that they have to be trading at something like 20% free cash flow yields to be interesting since they are not growing businesses and the industry has a big capex risk. You usually need to get energy assets outrageously cheap to make money. Oil demand growth also faces more headwinds than in the past (less so for gas). I have to admit, I think I missed the opportunity to own certain oil & gas assets in 2020/2021.
In all, I think the way I looked at it, it's simply not the first place I'd be fishing for ideas.
Thanks, great response. appreciate it