Making sense of the markets this week: June 12

Five-Dollarama 

In an otherwise quiet North American earnings week, investors looked to the Dollarama (DOL/TSX) earnings call to get the latest information on which way consumer winds were blowing.

It turns out that they’re blowing towards deep-discount dollar stores.

Dollarama announced a blistering 20.9% increase in adjusted earnings for its first quarter, to $300 million. Diluted net earnings per share were up 32.4%. The company also took the opportunity to announce a 9.9% dividend increase. Share prices were up roughly 3% on Wednesday.

When we combine Dollarama’s quarter with the excellent first-quarter earnings announced by Dollar General (DG/NYSE) and Dollar Tree (DLTR/NASDAQ) a few weeks ago, as well as the recent troubles at large retailers like Target, it’s clear that consumers are becoming much more budget-conscious when buying everyday goods during this inflationary period. Also of note is the fact that Dollar Tree and Dollar General posted excellent quarterly results a few weeks ago.

Interestingly, Dollarama also announced that it’s lifting its top price point from $4 to $5, so it can expand its product mix. I can’t think of a clearer sign that inflation is trickling down to reach all parts of the economy.  

Neil Rossy, president and CEO of Dollarama, stated, “With the lifting of COVID-19 restrictions across Canada early in the quarter, we were pleased to see a double-digit increase in customer traffic, coupled with strong demand for our affordable, everyday consumables and seasonal goods.”

He went on to add, “Our strong performance across key metrics in the first quarter reflects the relevance of our business model and positive consumer response to our value proposition in a high-inflation environment.”

Given the mixed retail results we’ve seen during the first quarter, two things have become readily apparent:

1) Consumers are shifting their preferences away from the “all goods all the time” pandemic trend and back to a more service-heavy buying pattern. 

2) Retailers that can control their expense budget lines while also doing their best to rein in price increases will be rewarded by cost-conscious buyers.

Does high inflation = high returns for gold?

On Friday morning, the U.S. Labor Department announced that U.S. inflation hit a new 40-year high of 8.6% in May, more than Wall Street was expecting. Disappointed investors quickly pushed the Dow down more than 2.5%, the NASDAQ down more than 3% and the TSX more than 1.5%.

All of which might augur well for the price of gold, one might think. But apparently not: The price of gold has gone up nearly 40% over the last three years, but the current price of USD$1,852 per ounce is down from a high of USD$2,035 in August 2020.

While folks such as Harry Browne and his “Permanent Portfolio” have proposed gold as an inflation hedge in the past, it hasn’t been all that useful in a hedging capacity in recent memory.  In fact, contrary to many people’s almost religious devotion to the precious metal, gold hasn’t been a very good long-term investment. (You might remember my column from a few weeks ago, when I explained that bitcoin being called “digital gold” wasn’t exactly a compliment.)

That said, whether or not you believe the price of physical gold will go up, the cash flows and profit margins of gold mining companies are often a little easier (and more profitable) to predict. Gold miners have done well over the past three years, and generally speaking, when the price is over $1,200 per ounce, Canadian mining companies have no problem making money.  

Gold Fields (GFI/JSE), the world’s sixth-largest gold miner, made news last week when it announced the $6.7-billion acquisition of Canada’s Yamana Gold (YRI.TO). The all-share deal valued Yamana stock at a 33% premium over its 10-day moving average. Initially, the deal was viewed as a sign of strength in the sector, but with Gold Fields shares dropping 23% since the announcement, the reaction has become mixed, and there is some skepticism as to whether the deal will get completed.

If you’re looking to invest in gold, there are much easier ways of getting portfolio exposure than buying a vault to house bars of the shiny stuff. Canada has several ETFs that allow you to invest in gold in a variety of ways. The Horizons Gold ETF (HUG/TSX) uses futures contracts (a.k.a. “paper gold”) to track the price of gold, while the iShares S&P/TSX Global Gold Index ETF (XGD/TSX) will give you instant exposure to gold mining companies operating in Canada and around the world. Finally, the iShares Gold Bullion ETF (CGL/TSX) actually takes investors’ money and purchases physical gold bullion. 

You can check out MoneySense’s look at whether gold is worth adding to an investment portfolio.

If not mineral gold, how about the liquid variety?

While the world’s stock markets have not done particularly well in 2022, Canada’s energy sector has cushioned the blow for investors in Canadian equities (as illustrated by the VXC ETF vs. VCN ETF battle below).

A large part of this outperformance for Canada has been due to companies in the fossil fuels extraction and production industries. 

There is no question that the same high oil prices that have caused a lot of the inflation we are seeing around the world are also fuelling massive profits for some of Canada’s largest companies. Moreover, investors are demanding more efficiency from producers, instead of the growth-at-all-costs model of previous oil booms. This focus has resulted in not only increased production, but also pretty incredible profit margins.  

Of course, Canada isn’t alone in cashing in on high fossil fuel prices. Saudi Aramco is gushing so much profit that it recently regained its status as the most valuable company in the world. Natural gas giants such as Qatar Energy are enjoying perhaps an even more sustainable bull market.

Despite the eye-popping profit numbers being put up by some of Canada’s massive energy companies, the rise in fossil fuel prices hasn’t been great for the rest of the Canadian economy. Taking into consideration how quickly fuel prices around the world are rising, combined with climbing interest rates, it’s tough to say with any certainty how central banks and various stock markets will respond.

Many Canadians are hoping their energy investments will help their portfolios at least keep pace with inflation. I’ve read interesting pieces by smart folks who believe oil might not be a great inflation hedge beyond the very short term. Other smart folks continue to cite facts that back up the traditional idea of oil being a good way to shield a portfolio from inflation losses. Overall, due to the solid helping of Canadian market ETFs in my portfolio, I’ve got a pretty strong grounding in energy already. I don’t feel that I need to overweight the sector beyond my “natural Canadian home country bias.”

More slices of a growing pie

Amazon’s 20-for-1 stock split worked out well for shareholders this week.

When owners of Amazon shares (AMZN/NYSE) went to bed last Friday night, they knew that each $2,447 share they owned had been split into 20 shares worth $122.35 each (figures are in U.S. dollars). When the market closed on Monday, each of those 20 shares was selling for $125. Not a bad one-day return!

Amazon is the first of the big tech giants to execute a stock split this year, with Alphabet (GOOG/NYSE, GOOGL/NYSE) and Canada’s own Shopify (SHOP.TO) soon to follow.

When a stock splits, the following things should remain the same for you as a shareholder:

• The overall value of your investment

• The overall amount of the company you own (assuming the company has not issued any new shares)

Because I teach teenagers, I like to use food analogies. The Amazon pie was growing so fast that if the number of pieces it had been cut into stayed the same, soon very few people would be able to afford a piece. By cutting each piece into 20 smaller pieces, Amazon has made it easier for new investors to purchase a single slice. If you already held shares, the total amount of pie you have hasn’t changed—but you now have 20 smaller, more manageable slices for every one massive slice you used to have.

If that made you hungry instead of more knowledgeable, here’s a helpful example from Visual Capitalist.

Now, while there is some evidence that recently-split stocks tend to outperform, this is probably due to selection bias more than anything else. Companies that have long-term durable advantages (I can’t think of two better examples than Amazon and Google) tend to grow to the point where they can make use of stock splits. The characteristics that allowed them to grow quickly will obviously allow them to keep growing, at least to some degree, going forward.

It’s not the stock split itself that causes the value of shares to rise—it’s the underlying performance of the company. The other variable is that perhaps these stocks get a small boost due to increased demand for shares, now that more people can afford to buy a whole share. That said, with so many brokerages allowing fractional share trading these days, I have to think even that small boost will be muted.

Cleaning up trailing commissions

A quick addition to last week’s news about the demise of deferred sales charges (DSCs) for mutual funds: As of June 1, Canadian Securities Administrators (CSA) has also banned annual trailing commissions for mutual funds sold via online discount brokers.

Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances over at MillionDollarJourney.com and the Canadian Financial Summit.

About Kyle Prevost

Kyle Prevost is a financial educator, author and speaker. He is also the creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course.

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