An Ernest Opinion

Given the sharp decline in share prices of certain sectors to start the year, particularly among shares of smaller, more speculative technology firms, it is a natural question to ask how an investor should react in such markets. This blog will explore some of my thoughts about behaving in these markets.

In talking to other investors about Costco, the main question is whether Costco can still thrive in a world where Amazon and others can deliver an infinite selection of products to your house in one or two days. As this blog will discuss, e-commerce is more an opportunity than a threat for Costco and the management has cleverly designed its e-commerce strategy in a way that grows Costco’s market share without cannibalizing its core business.

One of the hot topics of the day among investors is the regulatory crackdown by the Chinese government and President Xi on various industries, most notably the for-profit tutoring and technology sectors. These issues have driven the benchmark MSCI China Index, which tracks a portfolio of internationally listed Chinese equities, down 13% year to date and over 27% from the high in mid-February with shares of major technology companies such as Alibaba, Tencent, and Didi down even more.  

Netflix CEO Reed Hastings famously said that Netflix competes against Fortnite more than HBO and demonstrated that on Wednesday by hiring Mike Verdu as the Vice President of Game Development. Mr. Verdu previously led Augmented Reality/Virtual Reality efforts at Facebook, and also led mobile gaming efforts at industry leaders Electronic Arts, Kabam, and Zynga.   

Although banks now have diversified their sources of income to include major areas such as wealth management and trading, they still largely succeed or fail based on the performance of the loans they make to consumers and companies.  COVID-19 shutdowns were a big risk to the Canadian banks. People who lose their jobs cannot pay their rent, mortgages and credit card debt, and Canadian household debt was already at historically high levels.

Canadian railroads are terrific examples of the types of businesses we like to own. They own irreplaceable assets that provide essential services, have a significant cost advantage vs trucking, and have strong pricing power. Given the low population density and reliance of the Canadian economy on resources, CN Rail and CP Rail together move about 70% of inter-city surface freight in Canada and virtually all the lumber, grain, fertilizer, and coal production. Most Canadians simply do not realize the degree to which our lives and the economy rely on the two major railroads.  

After failing to acquire Cogeco Communications in September 2020, Rogers turned its eyes to Western Canada and announced the acquisition of Shaw Communications on Monday morning for $26 billion ($40.50 per share). Shaw’s legacy business is its wireline footprint in Western Canada with 5.1m consumer and small business subscribers in B.C, Alberta, Manitoba, and Saskatchewan. Rogers has no cable footprint in these provinces and does not directly compete with Shaw for wireline subscribers.

Almost exactly one year ago with the world teetering into the COVID-19 crisis, I wrote a blog discussing some thoughts on investing through a crisis and in the blog, I outlined four criteria that investors would be well-served to follow.

TFI International (formerly known as Transforce) is a gritty business that doesn't capture the imagination of r/wallstreetbets, but through skillful operations and capital allocation has delivered very healthy returns to shareholders over time: a $1 investment when current CEO Alain Bedard took over in 1996 is now worth over $200 vs about $2.70 for the S&P/TSX index.

While historically the benefits to Constellation Software of remaining as one company have been significant, it is now on the verge of it's first ever spin-out of a major division - Topicus.com. In this blog, Ernest outlines the reasons Constellation is taking this step and concludes that this is simply the next step in their evolution into a mature organization.

Constellation Software is well known to be a serial acquirer of small vertical market software (VMS) companies, having purchased 500 or so of these in it's history and the results speak for themselves. A $1 investment in Constellation Software 10 years ago would be worth nearly $40 today, compared to only $1.30 for the TSX index. In this blog, Ernest outlines some of the challenges ahead for Constellation as it has grown to become a global conglomerate and how CEO Mark Leonard is saying he will approach the issue.

In early September, US cable provider Altice USA and Rogers Communications made a joint bid to acquire Cogeco Communications and its parent Cogeco Inc (I will refer to both as Cogeco). The proposed deal would have Altice acquiring Atlantic Broadband, the 9th largest cable provider in the US, and Rogers, Cogeco’s largest shareholder, acquiring the Canadian assets, mainly a cable footprint in Ontario and Quebec and giving Rogers an entry into Quebec. The deal was quickly rejected by Cogeco with President Louis Audet stating Cogeco was definitively not for sale. Despite this categorical rejection, the would-be buyers increased their bid by about 10% to $11 billion in mid-October. Not surprisingly, the increased offer was again summarily rejected by the Audet family.