do canadian stocks make for great value investments and if so in what
sectors? Cannabis? Oil? or Tech? My guest today is Kim Shannon she's a founder and
Co-CIO at Sionna Investment Managers in Toronto, Canada which is one of the largest
independent investment firms led by a woman. We're going to jump right into Kim's overview
of the stock market her long-term investment strategy and her number one focus in 2021.
History tells me how human beings collectively in the past
have made mistakes that we're likely to make again in the future. A one percent
better dividend yield than either of those two major markets
so you're getting paid to wait and you're getting a better future expected returns. Well it was hard
not to ignore the marijuana sector in Canada for several years because we legitimized marijuana.
My name is Kiana Danial, I'm the best-selling author of Cryptocurrency Investing
for Dummies and the founder of the Invest Diva Movement where we aim to help
one million moms take control of their financial future by the year 2025. If that's you or if you
know of a mom who could benefit from taking control of her financial future go ahead
and hit that subscribe button and share away now let's go say hi to Kim Shannon
Welcome Welcome Welcome Kim thank you so much for your time we're super excited to have you here
and oh my goodness I cannot wait
to learn about what you are looking at right now in the markets and why
It's a delight to be joining you on your show and it's not often that I get invited with
to speak with women in the industry and so that's always a treat for me as well.
I'm happy to talk a bit about our value investment approach and and I've always believed that the
stock market is as much about human emotions as it is fundamentals and that human emotions
are a very significant part of returns and when investors forget about that
they really miss out on what's really going on in the market overall because emotions can have
markets go to euphoric highs and depressed lows which creates opportunities for value managers.
So as a value manager we try and determine what the long-term true net worth of a stock is
and the key element for value investing is buying it well below that long-term fundamental value
and there's a belief and we've seen it over time that stocks do what's called reversion to the mean
they tend to go back to where they've tended to be in the past
and if the stock's trading significantly below if a dollar happens to be trading for 70 cents
then if you are patient enough eventually and the fundamentals are right and the risk is acceptable
the stock will tend to revert back to its mean creating good reasonable returns for investors
so that's sort of the core element of what we do as value investors overall
Oh my god I couldn't agree with you more the whole market is about people who creates the prices
people it's not like some angel or god or robot it is people it is market sentiment if you understand
human psychology you understand the markets and by the way one of the reasons why women are actually
kind of better at investing because we are better at understanding human psychology aren't we
And the other major element is also looking at financial market history and not a lot of people
do study history but to me history is important yes you know there's new inventions and there's
new investments in the marketplace but we can look at history because human emotions have not evolved
and you know we all have relatively short investment time horizons and we make the same
mistakes over and over again so history tells me how human beings collectively in the past
have made mistakes that we're likely to make again in the future and that's why
I like to look at financial market history to see the human excess in the past and make
guesstimates about how we're likely to miss things going forward again in the future
Is it safe to assume that you actually are referring to technical analysis by this?
No we're very much fundamental bottom-up investors but you know we do want to look at when the
fundamentals when human beings have speculated a lot in the past and have overpriced securities
in the past like for example today a number of markets are trading in the top most 10 percent
of valuation as in history and you can draw a lot of similarities in the marketplace today
to the 1929 stock market period the 7374 stock market period and 2000 in particular to today
and so it can give us some lessons about what might occur going forward in the future.
So can you please tell me what categories you're looking at right now because we know
that we had this major bubble per se with the tech industry are you referring to that
with being overvalued category and if so then what are you and if not
what are you looking at right now as a fundamental value asset.
Well an entire market is composed currently today of 11 different industry group sectors
and at any point in time some sectors are very richly valued and others are not
and yes right now there's the tech space is rather pricey not all parts of the tech space there are
some value elements in the tech space and so value managers tend to try and find the cheaper places
in the market and invest in them we believe that the price you pay when you enter an investment
has a significant impact on your long-term returns and if you pay too much with reversion to the mean
it when it reverts back down you can lose some returns so there's always an opportunity set
within the market even you know in history they've divided the market into two groups the most
expensive slices and the cheapest slices and the cheapest slice of the market historically trades
somewhere between a 5 and a 10 pe multiple now today the overall US market is trading
you know in the mid-20s and history is always suggest you know when you have that rich a p
e multiple the subsequent 10-year return tends to be sub-par but if you bought the collection
of stocks that were reasonably priced and had good prospects your next 10 years could be better
When I talk to value investors I feel like different value investors have slightly different
definition of what value investing really is so I've spoken with valley investors who said
you know what if it's a great asset if it's something that I know is going to be in the market
it's going to continue to create value in the marketplace the company itself is actually helping
people then I don't even care what price I pay for it I'm gonna buy at the current market price then
we have other value investors like yourself who are like you know what it is not enough
and correct me if I'm wrong it is not enough that it's a great asset it has to be at a fair
value price as well so how do you go about this to really balance the two?
Well what you do is you look at the history of the stock and how it's tended to trade relative
to the market throughout its history and you look at various fundamentals um classically in value
people will look at a price to earnings multiple or if you will a price per pound you know are you
gonna pay a dollar per pound or ten dollars per pound for that stock and and what's the
norm and you'd like to buy it cheaper than it normally is another one is a price to cash flow
the flow of funds the cash machine generation of the firm overall and another indicator of value
would be dividend yields and very rich dividend yields mean that a stock has a very defensive
characteristic on the way down if the overall market falls and you have a rich dividend yield
at some point your stock will stop falling as long as that dividend is is likely to be
sustainable going forward in the future so those are all indicators that you can use
to tell whether that stock is cheaper than it has been historically and then you want to definitely
add in how risky is this stock how likely is it to disappoint is it a cyclical business
or not and then taking all those elements into account trying to buy a subset of stocks
that are well diversified portfolio of relatively cheap stocks that have a better prospect of
getting an above average return in the future and it's always good to anchor on what the historical
average returns are in markets and in major developed markets the long-term historical
average is usually somewhere between nine and a half and ten and a half percent so try and
build a portfolio of stocks offering a greater than nine and a half percent return and avoiding
stocks that will get you a more modest return in the long run as they revert back to those means
So I think the inevitable question is what are you looking at right now we are recording
this today as June 18th 2021 by the time this is probably going to be a little bit later when it's
published but I would love to know what are some of the areas that you're looking at right now?
I'd like to point out that I operate in Canada in Toronto and right now Canada is as a marketplace
an inexpensive marketplace relative to both the US and the global benchmark and we're trading at
much cheaper p e multiples than the other major markets trading with an expected 10-year return
sitting more like four to six percent average return whereas the US and global benchmarks
given p e multiples north of 20 are offering expected returns closer to one based on history
plus Canada has a one percent better dividend yield than either of those two major markets
so you're getting paid to wait and you're getting a better future expected return so just off the
top I'd like to put out there that Canada is an interesting place to invest because it hasn't
been as good a performer it's lagged and now it's starting to get a bit of a catch up and
markets tend to offer similar long-term returns in the long run in the short term they can get
a little out of whack but if you dive into the Canadian marketplace there's a couple of really
interesting areas and one interesting name in Canada is a very large Capstock
oil energy oil sands company called Suncor and it's offering a great expected return right now
and you know we've had a big move in the energy space in the last year
and the commodity price has really come to back dramatically in the last year
from negative 35 dollars a barrel very briefly last spring to over 70 dollars a barrel today
and the stocks some stocks have recovered more and Suncor in particular just really hasn't moved with
that commodity price yet and so there is more upside in our opinion in a name like Suncor
I have a lot of opinions on oil I'm kind of debating whether i should talk about it or not
but i actually so you did mention something really interesting Canada
because literally everybody we have students from all over the world
and everybody is interested in the US market and there is a kind of a strong indication that the us
itself is kind of becoming more and more unstable we still have amazing companies and amazing
culture and all these things but Canada is definitely catching up.
I'm gonna put oil over here because I have open oil but I would totally agree with you on the
fact that we should not neglect the fact that Canada is as up and coming and people who are
talent in America who is getting fed up with everything going on in America is actually
kind of migrating to Canada and I know you were talking about more of a financial history but also
like just talk looking at the future every power every superpower has to come to an end and having
a more internationally diversified portfolio definitely can be to your benefit and that is
amazing so do you kind of even in Canada do you go category by category or are you solely investing
in Canadian assets or you're more international do you think what do you think about china?
Well we are largely uh domestic equity investors we do have non-domestic funds but you know where
you know my specialty is still Canada so that's why i give the best value when I'm speaking to
investors overall but there's lots of other interesting segments in Canada I think the
financial services area in particular um you know both the banking sector and the insurance sector
are low p e multiple areas of the market with above average dividend yields and the
other interesting feature in Canada today is that our aggregate market dividend yield
is significantly higher than our 10-year government bond yield
so rather than buy a 10-year government bond which in the US right now 10-year government bond yields
are higher than the dividend yield right now in Canada the dividend yield is significantly higher
than the 10-year government bond yield and so you're better off investing in equities than in
fixed income right now in Canada then you could add on to that by buying some of the insurers
and some of the banks we're very interested in bank of Nova Scotia which is uh you know
well globally diversified Canadian bank and it's lagged some of the other major Canadian banks it
has an opportunity to play a little catch up here and has a fairly rich over four percent dividend
yield and same in the insurance space you're seeing a lot of opportunities there we quite like
Fairfax financial as well as a life insurer called Manulife both have relatively rich dividend yields
and fairly reasonable prospects to to revalue upwards over the next year or two we believe
Amazing so I noticed that you mentioned a lot of more traditional sectors
even Americans I think if someone wants to invest in the Canadian industry I think
the first thing that comes to their mind is okay we've got to get into marijuana sector
what are your thoughts on that and are you even investing or even looking at that sector?
Well it was hard not to ignore the marijuana sector in Canada for several years because we
legitimized marijuana earlier than in the US and so we had a publicly listed market
earlier and we saw it take off quite dramatically in advance of the legalization of cannabis
and it became quite speculative and overvalued and then you saw it come down and as value managers
we had written pieces about how overpriced the sector was and again as a value manager
we strongly believe that the price you pay when you enter an investment has an enormous impact
on your long-term returns and if you overpay it can have a deleterious effect on your long-term
results so it came down and I understand it's now getting it's you know there's a lot of enthusiasm
and it's getting overpriced again because you have a lot of American investors starting to
get quite interested in the space so no we don't own it right now because we don't see
value there at the moment so we try and really go where we see value
That's amazing thank you so much Kim this is so informative and eye-opening
to really understanding that you know what there are so many multiple paths to wealth
and you are making money and you've had guests from all over the world who have focus or
focusing on their own sector and their own money as well and I think at the end of the day we want
to just make the best decisions based on what we understand and I love the fact that you're staying
true to who you are and where you are and focusing on what you know best which is the Canadian market
and we truly appreciate your expertise as well thank you so much on our show thank you