By Craig Maddock, CFP, FCSI, CIM, FICB, CFA, MBA
Vice President, Investment Management
Just last week, my colleague Wesley Blight wrote an article on why our banks are unlikely to suffer as a result of Canadians’ excessive level of debt. This had followed a report suggesting that Canada’s big banks were showing early warning signs of stress.
Then on March 10, the same day that article was published, Canada’s second-largest bank, TD Bank saw its stock drop 5.5% after CBC wrote a story about TD’s aggressive sales practices.
Three weeks earlier, I had penned an article about Tim Hortons’ parent company, Restaurant Brands International (RBI), buying Popeyes, and why we viewed the acquisition as a positive development. Then earlier this week, the Globe and Mail reported that Tim Hortons franchisees were pushing back against RBI’s cost-cutting measures.
News stories like these happen all the time, and they raise some important questions. What do we, at MD, do when holdings in our portfolios are affected by negative news? How do we analyze and account for the risks?
Seek information from the source
Our first job is not to overreact. We assess which issues we need to monitor and then determine whether they affect our decision to continue holding the stock.
It’s always useful to seek out both sides of the story so earlier this week, I contacted RBI asking them how they’ve responded to the current allegations. Their reply to me included the message that Tim Hortons’ brand president, Elias Diaz sent to franchise owners which addressed some of the allegations about the Tim Hortons business. Their response demonstrated an acknowledgement of the issues and suggests they will take the appropriate action.
However, RBI’s issues with its franchisees are not a new phenomenon. Changes within a business often create short-term disruption and frustration, and from time to time, unfavourable media coverage like this can make it seem like the company’s long-term viability may be affected.
When we assess RBI as a whole, for example, we can see that it is very in much tune with its end customer. Since RBI was formed in 2014 out of the Burger King-Tim Hortons merger, its franchise sales and profitability have shown year-over-year growth. The changes that the company has already made—and likely plans to make—will ultimately improve its future competitiveness.
So while the franchisees may be going through growing pains, profit growth for our investment appears solid.
Listen to public sentiment
In addition to contacting firms directly, we can assess the impact of bad publicity through online and social media monitoring of reputation, measuring the public’s trust and commitment to a firm. Following CBC’s Go Public story, the big banks’ share prices fell across the board, with TD taking the biggest hit.
According to the analysis we received, TD’s trust and commitment scores dropped to their lowest level in 90 days, whereas the other banks fared better. Though this was not a surprise, it confirmed our suspicions that the general public would not react kindly to these allegations. Tools like this can add to our deep and exhaustive analysis and help us look beyond the short-term missteps by management.
Trust in the disciplined approach
Although public sentiment provides an extra perspective when analyzing a company, at MD, the key is to ask ourselves whether a company’s intrinsic value is sufficiently higher than the current stock price. That means reassessing a company’s fundamentals: its revenue growth, profitability and competitive positioning, among other factors.
When you’re investing in stocks of companies, it’s hard to predict when or where sources of volatility and risk will emerge, or how significant the impact will be.
In the short term, the banks’ profitability could come under pressure from any number of events, and their stock prices could drop further. But over the long term, we think Canada’s big banks will take the appropriate action to regain consumer confidence and deliver a positive rate of return relative to their level of risk.
Stock prices are set by the interaction of people, and we have a tendency to react emotionally to news stories like these. As an investor, it’s essential to see the big picture and not overreact to market sentiment. At MD, we believe that our disciplined approach to investment management will help ensure success for our clients long after the news cycle has moved on.