BNN - Monday, May 27, 2024 - 12:00 p.m. (ET) - Segment #2

>>> We have greg in toronto. Go ahead, greg, please. >> Caller: hello andré and jason. Good afternoon. Jason, I wanted to ask you about your thoughts about the uranium sector. Denison mines specifically. This renaissance towards uranium that seems to be in the future and how one capitalizes on it including how the [indiscernible] is focusing on it if you are involved in that area. I'll hang up and listen to your call. Thank you very much. >> So resources. Because I mean that's what uranium is is a resource. It's an interesting question and it's an interesting call. This is an area that we are not involved with because quite frankly it requires too much predicting. For example if you held uranium in 2010 you probably started to feel pretty good about things and they have the fukushima crisis in japan knocked it down and here we are, what are we 11 years later, it's sort of taken that it long for uranium to get back. I understand why people get excited about uranium but I have been at this for 20 to 30 years now and there's been periods where people get quite excited about uranium because of course nuclear power is clean, cheap, safe, wonderful energy and that's a whole other conversation that I don't really want to wade in to today. I'll also note that when you are. [ audio interruption ] the support meaning that the earnings aren't there I think that could be quite -- [ audio interruption ] >> Andrew: we are having trouble with our. >> Return on invested capital hasn't been strong. >> Andrew: we were having a bit of trouble there with the connection. Just give us that last remark again if you would, jason, please. >> I was just saying that the returns on invested cancer research in the space have not yet been -- have not yet indicated to us that the current sort of hyperexcitement around uranium warrants necessarily the advance that we have seen in the price of uranium or these uranium participation units or denison mines or what have you. So there is a lot of expectation built into the recent action. >> Andrew: okay. It sounds like not going head over heels into uranium.

>>> Don in edmonton, go ahead, please. >> Caller: hi, andrew. The don here. We talk quite a bit on twitter. Okay. My question is with nvidia. I am playing nvidia using this nvidia bboe canada and it's a fractioned play and I want to know what your guest's thoughts on this and what is the strategy. They are going to split 10 for 1. Will my stock split? >> Andrew: go ahead, jason. Nvidia. >> So I mean the word-play in the guest's question indicates to me that he is probably looking at this as a very short-term decision or move. I have no comments on the short-term nature of this type of company. I will say that the company does meet a number of the criteria we look for. It is founder-run founder-owned. Their returns on invested capital have been quite strong. However, the valuation is 62 times earnings would leave us on the sidelines. We also accept the fact that we may miss these types of massive moves in some of these companies simply because they don't have the history of those strong returns on invested capital and this is a very, very fast-moving space. So yeah, they will split the shares 10 for 1. I think we would probably be a nice time for us to remind everybody that that doesn't do anything for the stock. So the company itself if it's worth what I am seeing here $2.6 trillion when it gets split 10 for 1 they will still be worth $2.6 trillion. He there will be ten more shares outstanding at 1/10 of the price it. Could give some sort of short-term boost. We are with long-term focused at hill s we are looking at the long-term for our shareholders. Or should I say our investors. And nvidia is I guess one that we have missed but we are okay with that because it simply wouldn't have come across our screen with the tragectory that it's had. >> Andrew: thanks for the question.

>>> We have an email from jacob. What metrics do you use to identify growth stocks that will outperform? >> I have been on bnn for five years. This may be the best question I have had during that time frame. It speaks to the type much process we are involved won a day to day basis when we are looking to invest in securities on behalf of our clients here at hillside. The number one metric that we look at to be able to help us understand and find a security that is likely to outperform is the -- I talk about it all the time is the return on invested capital and there is a number of return metrics we can look at. There is return on invested capital or riot. Return on equity, return on assets and we can get into the minutia on the differences between them all. Let's say you look at a spattering of those return met ring. We will just pick return on equity for argument's sake. Average return on equity in the market is around 8%. Standard economic theory will say that if you have a business where the return on equity is 20% or 30% competitors will come in and eat the lunch such that the returns for all of the businesses in that space will go down to the cost of capital which is around 6, 7, 8%. However, in practice when we look at some of these companies it be constellation software, alimentation couch-tard, nike, meta, even nvidia, google, et cetera, et cetera, and we see these businesses that have been able to produce a return on invested capital of 20% for years and nike's case or alimentation couch-tard's case we are talking about decades. What that tells us is that there is a competitor edge or there is a moat around that business that is preventing other businesses from coming in and reducing the return on invested capital. So that would be the number one metric. I don't know if you want me to keep going here, andy, but this is an excellent question and businesses that are set to outperform will have a history of producing strong returns on invested capital. >> Andrew: is there a big difference between invested capital and return on equity? Can you generalize? >> Not really. So return on equity can be [indiscernible] by levering up your balance sheet. Return on assets is the single most return important metric that you can look at because it can't be increased by debt. So return on assets I would say is probably the prime airy one you want to look at. Of course there are others such as the insider ownership. We won't generally touch a business unless the insider or founder so the operators people that are running the business own a sizeable portion of that business or at least have a sizeable portion of their net worth in the business because we want them to be behaving and acting like owners like shareholders like us so that there is a very nice alignment of interest on that front, too. >> Andrew: we will take a quick break and when we come back and we will have a look at jason's past picks when we return. [ ] (Dynamic instrumental music) Canadians are facing a newnormal with interest rates and investment options. The Capital DirectOne Income Trust is in a growing asset classthat provides stability and is income generatingfor portfolios. Here from Capital Directare Eire Gorman and Aaron Narayan,great to see you again. Thank youfor having us back, Mark. There can be some uncertaintyfor those renewing mortgages. Would you say that someCanadians are struggling with their new debt load? Honestly, Mark, that couldn'tbe further from the truth. In 2023, we wrote off onemortgage worth $49,000. We're sitting on a portfolioof over $410 million. Canadians are findinga way to cope and Capital Direct investorsare supporting this. While earningan annualized return of 8.3% which is what we kicked outin q4 of 2023, and we've now seena further increase in the returnin q1 of this year. Canadians investing in eachother is a good investment. Aaron, what'sa good way to visualize these residentialmortgages within the trust? Think of an ETF,a basket of stocks. Our trust is a basketof residentially secured instruments on thousands of carefully selectedproperties across Canada. What are someof the changes and some of the trendsin the sector? Mark, as we've heard,this is a changing space. Canadiansare taking more control of their personal finances both in how theymanage their obligations and where theyinvest their money. We've seen a lot more interestin our product as we offer that opportunity for stability away from thevolatility of other markets. And how would you definethat stability? Well, consistent returns. We've never capture redemption. And our $10 unit price hasnot changed since inception. These are just some examplesof our commitment to stabilityfor our investors. If advisorsor investors are interested, how do they reach you? Yes, portfolio managers and financial advisors canfind us at incometrustone.com. And for direct investors, you can call us at any timeat 1-800-625-7747.

>> Andrew: jason was on our show may 26th of last year. His first idea was kakaku.com which is a comparison price comparison shop web site in japan. >> Right. Yeah, so this is our third largest holding. We were able to add most recently in april of this year at 1400 yen. The company's -- I think you've got -- that look like the stock price of it. Obilla kakaku has another business which they are the yelp of japan. It trades at 21 times earnings at current price. The dividend yield is around it%. They also buy back shares. My research partner stephen and I recently met with them in japan in early march and they are a very well-run company. We think that long-term they should be able to increase earnings at around 10 to 15% and yeah, it's a strong business and as I mentioned their third largest holding at 13% equity weight. We are still keen and we are adding on weakness in the interim. A nice holding for us. >> Andrew: your next idea credit acceptance which is an auto finance player. >> Right. So this was the company that I was talking about in terms of the one that we have chosen over goeasy. So we have owned it since 2021. I think we added twice during that time frame at around $380. It's been as high as 700. If you look at a long-term chart of this company this is a classic example of a company that has really done a great job of allocating capital. And so what happens is when liquidity gets tight like right now with interest rates up they will be on their front foot underwriting loans and then vice versa when liquidity becomes easy there is more competitors in the space. They will either reduce their loan underwriting and then start to take that capital, excess capital and buy back shares. During the past 10 years they have reduced their share count by about 50% all things being equal. That of course increases owners' interest in the business as well as the earnings per share. So again, our question mark with this business would be the fact that it is not win-win. The customers do pay a hefty interest rate but of course this is their last resort. So this is a 5% equity weight for us. So within our top ten holds and one that we hope to own for many years to come. >> Andrew: okay. And then your final idea here was cal neck solutions which is a scottish firm, I believe, selling test equipment to the telecom industry. >> Right. So this is a cyclical business. They sell durable goods. And when we have a business that we are looking at that is selling durable goods. [ audio interruption ] to that business to generally under 2%. So calnex is a 1 1/2% weight to us. You will see that dramatic fall of the stock in october. We've been able to pick up shares at 41 pence and reduce our average cost. We are still down around 20% on the position. But basically the capex budgets for the likes of the telecoms, data centres, meta, amazon, what have you have been sort of pinched during this period of heightened sort of elevated interest rates. The founder and ceo of this business, tommy, has said that this is the fourth time he's experienced such a downturn in the 40 years that he's been involved in this industry. The reasons for the downturn generally vary but they will generally come back. And of course the tailwinds of us going from 4g to 5g to 6g the amount of data and computing power involved with A.I. and so on and so forth we think represents long-term tailwinds and the business will certainly see its fortunes recover and go on to make new highs. So we feel that this represents compelling value and we would caution that given it's a relatively small business, given that it is cyclical in nature that we would urge people to size their position accordingly like we have for our clients at around 1 1/2% weight. >> Andrew: okay, jason del vicario is taking your questions on north american and global growth stocks. 1-855-326-6266. [ ]

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